The Four Biggest Mistakes in Option Trading

Rating:
Summary: what a Joke
Review: by far a worthless book on options,
the cover looks great, but this has no
value; I learned more on the optionsxpress
website than this book, anyone who has
read an options book would not
appreciate this book it assumes you
know nothing about options and really
tricks you into thinking that the author
knows what he is talking about.

Rating:
Summary: A worthwhile read for any option trader
Review: I have just finished reading Jay Kaeppel's 1998 publication "The Four Biggest Mistakes in Option Trading". I found the book to be the most down to earth common sense approach to options trading that I have read to date.

Rating:
Summary: Excellent book but could be enhanced
Review: I strongly recommend you read this book before you even think about buying or selling stock options. I would have saved myself a lot of $$$ had I read this book first, because it explains very clearly and concisely why most option traders lose money. The text is highly readable and understandable. No long-winded or difficult theories here. Invest a few bucks and a few hours and you will be richly rewarded.

Rating:
Summary: Excellent book that delivers exactly what its title says
Review: There are four basic mistakes all beginning option traders make, these are:
1) Relying solely on market timing;
2) Buying only out-of-the-money options;
3) Using strategies that are too complex; and
4) Casting too wide a net on option choices

Relying solely on market timing.
It causes failure because it ignores implied volatility. It can lead to paying far too much to purchase an option. It would be like buying a stock without knowing its P/E, or buying a car without knowing its blue book value. The way to avoid this mistake is by carefully analyzing which options are best suited to achieve your objective. Also, measure what is the current implied volatility of these options and compare it vs. the historical volatility of this option. This will give you an idea of the current valuation of this option, and whether it appears overpriced or underpriced.

Buying only out-of-the-money options.
By doing so, you ignore the probability that the option will eventually be in-the-money. It leads to buying options with little likelihood of profiting. You can get lucky once. But, such a blind strategy is a sure way to get wiped out in option trading. Instead, you should know exactly what is the probability of you making money on each option trades. This entails knowing the "Delta" of a specific option. If an option has a Delta of 20. It has a 20% chance of being in-the-money.

Using strategies that are too complex.
This leads to unfavorable risk\reward situations. First, you should determine your objective and make certain the trade you are going to make can achieve those objectives without more risk than you can handle.

Casting too wide a net.
You will spend too much time wasted looking for opportunities among illiquid options. By doing so, you will waste a lot of your potential returns on the wider bid and ask spreads of these less than liquid options. Instead, focus on securities that have actively traded options.

This book is a real eye opener on option trading.

Rating:
Summary: Excellent book that delivers exactly what its title says
Review: There are four basic mistakes all beginning option traders make, these are:
1)Relying solely on market timing;
2)Buying only out-of-the-money options;
3)Using strategies that are too complex; and
4)Casting too wide a net on option choices

Relying solely on market timing.
It causes failure because it ignores implied volatility. It can lead to paying far too much to purchase an option. It would be like buying a stock without knowing its P/E, or buying a car without knowing its blue book value. The way to avoid this mistake is by carefully analyzing which options are best suited to achieve your objective. Also, measure what is the current implied volatility of these options and compare it vs. the historical volatility of this option. This will give you an idea of the current valuation of this option, and whether it appears overpriced or underpriced.

Buying only out-of-the-money options.
By doing so, you ignore the probability that the option will eventually be in-the-money. It leads to buying options with little likelihood of profiting. You can get lucky once. But, such a blind strategy is a sure way to get wiped out in option trading. Instead, you should know exactly what is the probability of you making money on each option trades. This entails knowing the "Delta" of a specific option. If an option has a Delta of 20. It has a 20% chance of being in-the-money.

Using strategies that are too complex.
This leads to unfavorable risk\reward situations. First, you should determine your objective and make certain the trade you are going to make can achieve those objectives without more risk than you can handle.

Casting too wide a net.
You will spend too much time wasted looking for opportunities among illiquid options. By doing so, you will waste a lot of your potential returns on the wider bid and ask spreads of these less than liquid options. Instead, focus on securities that have actively traded options.

This book is a real eye opener on option trading.

Rating:
Summary: Short and sweet but too theoretical
Review: This book is useful in directing novice options traders to the four biggest mistakes usually made in this area. The book does what is says with describing the theory behind the authors arguments but unfortunaly does not provide market examples on how that should be implemented in real life. Having read other books by this author, I am sure he is capable of supplementing his theory with examples . One of the mistakes he mentions is buying only out of the money options and he recommends buying in the money options. Unfortunately he does not address the fact that this approach could still result in a total loss if the option ends out of the money by expiration day. In addition to be successful in trading in the money options your timing needs to be accurate enough to be certain you do not face a total loss. Timing is never addressed in this book and you would need to supplement this by other books that focus more on this area.
Why 5 stars? Even with these shotcomings it is important that beginners know where they can go wrong and then focus on what to do right.

Rating:
Summary: Good but brief
Review: This is a good book, though a bit pricey for a book that can be read in less than 1 hour.

In it the author describes the biggest mistakes option traders make which are: ignoring implied volatility, making long-shot bets with options, using strategies that are too complex (for you), and trading illiquid options.

Material is good, with a chart of which strategies work the best for varios levels of implied volatility and other gems, but it's debatable if this book is worth its hefty price tag.

Rating:
Summary: To succeed you must know your enemy
Review: This is a very good book for what it does. It introduces novices to the common mistakes option investors make. Many more experienced option investors may find this book too simple for their taste. That would be unfortunate. Often times where more experienced investors falter is by dismissing the importance of fundamental information.

Mr. Kaeppel delivers that here. I have been involved with futures for almost 12 years. In that time I have caught myself committing any one of the "four biggest mistakes". Even throughout the years, after writing three books on futures and option investing, available on amazon.com, coI have had to catch myself in my trading.

This book is an easy read and will definitely add to your knowledge base if you are a novice. The more experienced will find this a welcome refinement to their trading style.