The Intelligent Option Investor Receives First Review!

The first review of my new book, The Intelligent Option Investor, was published on Investor.com and ValueWalk.com this week!

The reviewer describes herself as an “option trader,” and since the Intelligent Option Investor takes such a different approach to investing from that taken by traders, I didn’t expect many kind words. Much to my surprise, though, she was complementary about the book and thought that even option traders would get something out of it.

Indeed, in my experience, a lot of people trading options do not have much knowledge of the theory underpinning the instruments they are buying and selling. This represents a huge risk to those traders, and one that they can easily remedy by reading my book.

Certainly, you don’t have to be able to build an engine from scratch in order to be able to drive a car. Similarly, you don’t need to be able to derive Ito’s Lemma to be able to invest successfully using options.

However, you do need to know that cars run on gas and require oil to function correctly, otherwise, you are liable to encounter a great deal of frustration in driving. Similarly, without understanding the basic principles behind option pricing models, your investing experience is likely to be unduly painful, costly, and frustrating.

I do have one nit to pick with the reviewer. That is, she characterized the book as being directed to “beginner to intermediate” investors. In fact, I wrote that book so that someone who did not know a single thing about options or stock valuation could gain enough knowledge to be an intelligent option investor.

However, I also wrote the book with institutional money managers in mind, and if people managing billions of dollars of their own and clients’ capital cannot be characterized as “advanced” investors, I don’t know who can!

It’s true, the book only has a handful of equations in it, and only passing reference to “advanced” strategies like the “Iron Condor[1]”, but you would be hard pressed to find a book that speaks in more depth about topics such as:

·         How to measure and manage leverage in an investment portfolio

·         How to minimize the harmful effects of behavioral biases and structural impediments in investing

·         How to assess whether it is better to invest using In-the-Money, At-the-Money, or Out-of-the-Money options in different investment situations

·         How to separate the noise generated by the financial world (accounting restatements, analyst opinion changes, etc., etc.) from true signals about the value of companies and their stocks.[2]

These are all things that professional money managers I know and have worked with and for—some of them quite prominent investors with experience managing multi-tens of billions of client assets—struggle with on a daily basis.

I talk in the book about X-System versus C-System mental processes. Humans feel very comfortable operating in the X-System realm (pattern recognition, fight or flight reactions, etc.), but much less so operating in the C-System realm (logic, analysis, creative problem solving, etc.). Some people attempt to overcome their C-System process unease by focusing on minutiae and arcane details. The arcane details are, in fact, advanced topics in any field, but just because something is arcane does not mean it is important.

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[1] Which is a great strategy for a floor trader. Are you a floor trader?

[2] For those of you not familiar with the noise versus signal distinction, here is a good summary on Wikipedia.