Praise for the Intelligent Option Investor

My old boss, the founder and CEO of Morningstar, JoeMansueto, was kind enough to take the time to read through an early version of my manuscript and has this to say:

The Intelligent Option Investor reflects Erik’s keen understanding of how companies create value for their owners, which is essential to successful option investing. In addition to showcasing Erik’s expertise in developing option investment strategies based on fundamental security analysis and a long-term time horizon, this book delivers the information in a way that’s accessible to individual investors, offering them the resources to use options to help them meet their financial goals.

Thanks for the support, Joe!

Understanding Options

Like I explained in my post The Essence of Intelligent Option Investing, the The Intelligent Option Investor is split into three parts. Here's the introduction to Part I, which covers everything an intelligent investor needs to know about options and option pricing.

Don’t believe anything you have heard or read about options.

If you listen to media stories, you will learn that options are modern financial innovations so complex that only someone with an advanced degree in mathematics can properly understand them.

Every contention in the preceding sentence is wrong.

If you listen to the pundits and traders blabbing on the cable business channels, you will think that you will never be successful using options unless you understand what “put backspreads,” “iron condors,” and countless other colorfully named option strategies are. You will also learn that options are short-term trading tools and that you’ll have to be a razor-sharp “technical analyst” who can “read charts” and jump in and out of positions a few times a week (if not a few times a day) to do well.

Every contention in the preceding paragraph is so wrong that believing them is liable to send you to the poor house.

The truth is that options are simple, directional instruments that we understand perfectly well from countless encounters with them in our daily lives, and they are the second-oldest financial instrument known to humanity—in a quite literal sense, modern economic life would not be possible without them. Options are instruments that not only can be used but should be used in long-term strategies; they most definitely should be traded in and out of as infrequently as possible.

The first part of this book will give you a good understanding of what options are, how their prices are determined, and how those prices fluctuate based on changes in market conditions.

There is a good reason to develop a solid understanding of this theoretical background: the framework the option market uses to determine the price of options is based on provably faulty premises that, while “approximately right” in certain circumstances, are laughably wrong in other circumstances. The faults can be exploited by intelligent, patient investors who understand which circumstances to avoid and which to seek out.

Without understanding the framework the market uses to value options and where that framework breaks down, there is no way to exploit the faults. Part I of this book, in a nutshell, is designed to give you an understanding of the framework the market uses to value options.