Many consider options trading an unfamiliar and daunting area of investing. Fortunately, there are plenty of excellent books written on the subject to help traders understand the options markets and learn to trade them profitably. Here are five of the best available books that provide a clear education on options trading, as well as instruction on using various option trading strategies.
"Option as a Strategic Investment," by Lawrence McMillan
Considered by many to be the Bible of options trading, Lawrence McMillan’s classic from 1980, “Options as a Strategic Investment,” provides traders with practical option trading strategies designed to minimize risk and maximize the profit potential for an investment portfolio.
At over 1,000 pages, the book is an exhaustive reference on trading options. It contains information on the concept of using options investments, specific options strategies and market conditions in which they tend to work best, obtaining the best possible risk/reward position for an investment portfolio, using options as a hedge, and how tax laws apply to option trading profits or losses.
The book also offers detailed advice on trading index options, trading options on futures, and measuring and utilizing market volatility, and McMillan provides extensive examples and illustrations of numerous option trading strategies.
"Option Volatility and Pricing," by Sheldon Natenberg
Understanding market volatility and its relation to options pricing is key to helping traders conceptualize option pricing and evaluate fair value in the options market. Sheldon Natenberg’s “Option Volatility and Pricing” is considered one of the best volumes on this critical aspect of options trading.
Natenberg provides a clear, solid explanation of theoretical option pricing models, followed by instruction in specific trading strategies that have historically been the most profitable in various market conditions. He provides a wealth of material on risk management and evaluating trading opportunities in options, and even includes material on creating your own option trading strategies. Natenberg presents his material in a clear, easy-to-follow manner and helps readers to understand the key concepts involved in trading options, such as the relation of options to their underlying asset, volatility, and options pricing and the time value of options.
"Fundamentals of Futures and Options Markets," by John Hull
Options trading is particularly popular with traders who regularly trade the commodity futures markets. John Hull's "Fundamentals of Futures and Options Markets," which is considered a companion text to his “Options, Futures and Other Derivatives,” offers a clear understanding of the futures and options trading markets.
Hull is a widely recognized authority on derivatives, futures and risk management who has served as a consultant to many of the best-known investment banking firms. Considered an excellent reference work for both beginners and seasoned options traders, Hull’s book includes information on swaps and other derivative instruments, trading interest rate futures and estimating the time value of options, all presented in an easy-to-follow manner.
"Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits," by Dan Passarelli
A large part of mastering options trading lies in understanding what are referred to as the “Greeks." The “Greeks” are the Greek terms delta, theta, vega and rho, which refer to, respectively, option price movement in relation to underlying asset price movement, time value of options, volatility-related option price changes, and option price movements caused by changes in the risk-free interest rate, commonly equated with the yield on U.S. Treasury bills.
Passarelli's book explains the impact that each of these factors has on option values and presents various option trading strategies that seek to profit from changes in any or all of the “Greeks.” Passarelli aims to provide traders with the necessary knowledge and tools to more accurately evaluate option pricing and to better identify a variety of profit opportunities available through the skillful use of options trades.
"The Option Trader's Hedge Fund," by Mark Sebastian and Dennis Chen
“The Option Trader’s Hedge Fund,” penned by Mark Sebastian and Dennis Chen in 2012, offers traders a business model to earn consistently profitable returns from options trading.
In the book, options trading coach Sebastian and hedge fund manager Chen provide a step-by-step plan for setting up a short option investment portfolio, designed to generate steady income from selling, or writing, options. Sebastian and Chen present the idea of essentially setting up your own individual hedge fund as an options trader. The book’s numerous examples and illustrations make it easy for even a novice options trader to understand the options trading strategies presented. The authors offer especially helpful advice on the key options trading elements of risk management and volatility.