Understanding Options

by Michael Sincere

This straightforward, accessible guide clearly explains what options are and how they work, their pros and cons, their relationship with stocks, and how to use them to gain leverage, generate extra income, and protect against adverse price movements.

Genres: Finance, Nonfiction, Business, Economics, Money, Personal Finance

374 pages, Kindle Edition

First published September 22, 2006

About the author

Michael Sincere (www.michaelsincere.com) is the author of a number of investment and trading books, including "Understanding Stocks 2E" (McGraw-Hill) and "Understanding Options 2E" (McGraw-Hill), each which sold over 100,000 copies each.

His two latest books are "Help Your Child Build Wealth" (Wiley) and "Mr. Sincere Teaches You How to Sell Covered Calls."

Sincere has written hundreds of columns and magazine articles on investing and trading, including a monthly column for MarketWatch, "The Long-Term Trader."

Reviews

[Glen · Rating 5 out of 5]

I was in tears by the end of this book because it all made so much sense. This book has taught me everything I needed to know before I got started trading in options. I only wish someone had suggested it to me before I started buying them.

To anyone who has been religiously investing in the stock market these past 18 months and has been losing faith because the approaches we've been trained to use have failed us, this book is for you. To the buy-and-holders out there who feel betrayed by the big money, the bank CEOs, and your investment brokers; this book is for you. To those who want something which will work, something which is easy to understand and wrap your mind around, this book is for you.

I have traded options before without really understanding how it all worked. I've made (bought) good calls and bad calls, but this book finally shed light into this fascinating market that is not just reserved for Wall Street insiders. Average investors can use the covered-call writing strategies discussed in this book in plain English to make money-- not the get rich quick kind, but the honest, steady flow of income we've been looking for without being gimmicky and tainted. Covered call writing makes a person feel good, and this book makes you feel good.

If you have been looking for one book to describe the ins and outs of options, this is the one. Do yourself and your family a favor, and take an evening or two to invest in your future by reading this book.

[Christina · Rating 5 out of 5]

The best book on options I have read. Will increase both your understanding and your profits, no matter what your options trading experience.

[Rata · Rating 2 out of 5]

This book promotes what we may call Cargo Cult Options Trading: ritual inclusion of options strategies without really understanding the fundamentals. Feeding audiences who barely know what they are doing with these step-by-step guides (with screenshots) on how to buy and sell options is a sure way to get them slaughtered in the stock market. Readers who need these “Explain Like I'm Five” texts should *not* be trading financial derivatives. Some examples:

- “Luckily, all you have to do is plug numbers into an options pricing calculator to determine that volatility” → magic.
- “Traders plug their estimate for the future volatility (along with other factors that determine the value of an option) into the calculator to determine the value of that option.” → all right, but what’s that calculator doing?
- “To demonstrate how difficult is it to define [Implied Volatility], I’d like you to answer a question. Can you define gravity? It’s not too easy to explain, is it? If you are a scientist, the most precise way to define gravity is through complicated scientific formulas. You could also explain implied volatility with complicated formulas using standard deviation” → “complicated formulas"? Sir, gravity *does* have a definition.
- “Market makers always know the implied volatility because their computers generate that number, based on all the factors that go into pricing an option”. → So…. “computer says so”?
- The section on Delta doesn’t even mention that it’s *derivative* of the option pricing formula with reference to the share price. Same for the other Greeks — the explanations are just by analogy.

The “easy-to-read”, approachable style ends up being a little bit too patronizing:

- “There is one main reason that you are willing to sell covered calls. You receive compensation, that is, money. Do you remember what the money is called that you receive from the buyer? If you do, you have a good memory. The compensation you receive from the buyer is called the premium”. → “You have a good memory”.
- “This chapter is so important, and also so theoretical, thay you may have to read it more than once”.
- “Understanding implied volatility is not easy, so don’t worry if you don’t get it the first time. I certainly didn’t”.

Also, those adjectives thrown in randomly:

- “Ironically, the volume of trading in the first half-hour often exceeds the volume of option contracts for all of 1974.” → not what “ironic” means.
- “If you don’t know how to sell stocks short, you can read about this intriguing strategy in my book “Understanding Stocks” → “intriguing”.

The tautologies:

- “The correct put option is one that leads to a profitable trade”.
- “Buying low implied volatility requires your being aware whether implied volatility is high or low at the time you plan to trade” → like saying “buying a cheap house requires your being aware whether the house you’re buying is cheap”.
- “I suggest buying the kind of options that works best with your skills and ability” → not actionable advice.

And the contradictions:

- “If you want to avoid risk completely, then put your money in a certificate of deposit (CD) or a Treasury bill [...]. Although you can never eliminate risk completely, you can learn to manage it.” → you just wrote “completely” earlier!
- “You will typically use a bull call spread if you are moderately bullish about the underlying stock. [...] The bull call spread is ideal if you have a strong conviction about the underlying stock.” → moderately bullish versus strong conviction, just a few sentences apart.

[Terry Kim · Rating 5 out of 5]

Highly recommended as your first Options book. Very simple, easy to read (and even entertaining). I've always thought Options were quite complicated but the author in this book explains Basics of Options in a way that anyone could understand.

[Vijay Chidambaram · Rating 5 out of 5]

Written in an easy-to-understand manner, without getting into too many technical details. A great beginner book. Highly recommend!

[Tabs · Rating 5 out of 5]

Packed with intuitively explained essential information. Perfect first read on options. The author does a good job of keeping this intense crash course lighthearted and digestible.

[Nico · Rating 5 out of 5]

Over the summer, I decided to read the book published in 2014, “Understanding Options 2E”, written by Michael Sincere, in order to broaden my knowledge of a topic I had previously only briefly understood. This book is under the genre of finance, and I think Michael does a fantastic job in describing his experiences with the options market to the reader in an appropriate manner. The main theme of "Understanding Options” by Michael Sincere is to demonstrate a clear understanding of options trading and how the reader can manage risk while making a profit. The setting takes place in the sense of an investment environment like the financial options markets. The book starts by illustrating the fascinating and intriguing history on how option trading was derived. Michael then dives into the topic by explaining what steps and actions need to be taken in order to create your own account and try the novice-level strategies, like the selling and buying of call options. The third and last section of the book teaches the reader about the more intermediate level strategies, like trading of puts, spreads, straddles, and even teaches me about the Greeks that are involved with trading. I believe Michael describes his personal experiences very well throughout the text while also giving examples that are clear and concise.

Ordering this book, I wasn't sure how well I would be able to retain the information; however, I believe that the author describes options strategies perfectly. Michael does so with detailed and well-thought-out scenarios, demonstrating many scenarios and market conditions, giving his thoughts as if it were an over the table conversation. I liked how throughout the text he would sprinkle in accounts from his close acquaintances and how they managed different situations, even including a chapter with advice from Sheldon Natenburg. I believe the only complaint I had was some subjects I would have taken a different approach in understanding; however, Michael taught from speculative standpoints as well as safe investing styles. This is important because if the reader is trying to understand this complex subject, throwing information that may be harmful to a beginner trader would not be beneficial. In all, I think that this book is great for understanding and developing the basic skills, while also taking an approach to introduce and teach intermediate strategies. Not only was this book highly informative and helped deepen my understanding of the subject, but it was also enjoyable to read and did not bore me with straight information.

[Avery Ferrante · Rating 4 out of 5]

Having no background in stock market or options trading, this book does a good job explaining them from the simplest example building up to complex examples.

[JelaneyTaters · Rating 4 out of 5]

Good book for understanding options basics.

[JD · Rating 4 out of 5]

Easy to understand- plus the author is very funny!

[Nick · Rating 5 out of 5]

I understand some of the criticism that I've read regarding the beginner level information in this book but I do truly believe there is something for intermediates in here as well. Perhaps the critics read the first edition which to my understanding has a lot less advanced strategies.

Admittedly, the first 2/3 of the book was common knowledge to me but it did help solidfy my existing knowledge. The last 1/3 was great and definitely where I extracted most of my new information as I was mainly curious about various strategies and risk management.

5 stars from me as this was exactly as advertised from my perspective!

[matt · Rating 2 out of 5]

Very simple book on options...I'd only recommend it if it's your absolute first intro to the topic, and most of the info can easily be found online through CBOE, etc. It's a decent glossary on the topic, but there are much better books out there.

My biggest issue is he defines profitable (and other quantifiable terms) with relative words, not numbers. This is great as fluff, but at the end of the day with money on the line, profitability/risk is very quantifiable, and needs to absolutely be quantified to be successful.

[Patrick · Rating 4 out of 5]

Great little book for those with little to no understanding of options. Sure, there's a lot of resources online but I think you will get almost everything you need in this one little package. I find options to be fairly confusing and Sincere does a great job of laying the groundwork explanations for what options are, and going through strategies for the beginner, intermediate, and expert. A must read for those who want to start trading options but have no experience.

[Scott · Rating 5 out of 5]

Very good and clear fundamental explanation of trading stock options. Detailed and yet still in plain English. Conservative strategies with limited risk as well as more advanced strategies. I started reading this book with no knowledge about options and it all seems so crystal clear now. I finally feel confident to begin trading now.

[Dave · Rating 2 out of 5]

If you know nothing about options...

If you know nothing about options...

This book is for you. if you know even a little this is a waste of time. The author is so repetitive it's annoying. He clearly thinks that his readers can't remember they read five minutes ago. In short a waste of time with no useful information.

[Chris Esposo · Rating 5 out of 5]

Well written and commonly understandable introduction to buying and selling options contracts. The author has accomplished a rare feat in the annals of trading books in that this one can be understood entirely through audio listening, with little need to leverage charts, formulas, or diagrams to start trading these contracts. The pellucidity of his instruction is largely due to his well-thought-out pedagogy: 1. Introduce a topic concretely 2. Give some illustrative examples with simple exchanges 3. Go over basic decision criterion for profitability 4. Explore basic corner cases 5. Mechanically go over the step-wise function of writing the contract with a brokerage.

It doesn't hurt that thinking about options lends itself to binary decision tree-like analysis which should easily be digestible for most people. The author does a great service to the new reader on this front doubly by introducing contracts and strategies from easiest and most conservative first, namely selling covered calls, and progressing through increasing complexity each chapter to buying puts. There's also a small misc. the section on spreads, selling naked puts and strangles at the very end. Though this is really just an introduction to this material and isn't really functional.

A related plaudit that can be given to the author is that because of the methodical nature of this instruction, digesting the relatively small but esoteric nomenclature of options trading, being in/out/on the money, the strike, the logic, and consequences of leverage etc., is painless, and much clearer by the end of the book as the terms are thoroughly exercised in the analysis of the differing dichotomies of buying and selling i.e. for buying/selling a contract one may want the price to be on/below the money etc.

The sequential nature of the material allows practitioners to try out a particular strategy on their own and see for themselves how it works out in the market. From the standpoint of learning by doing, this book is probably best for those who have done a few months of equity trading on a hobby account, who's well versed with the 'logic' of buy-hold, but may want to develop gambits that can work for multiple market conditions, beyond the long and up. In this respect, selling covered calls will probably be the most useful strategy/contract combo that's outlined in the text, as it affords the practitioner to profit in sideways environments. From a comprehension standpoint, because it's also very similar to a profit-scheme of buying a rental property, as the author points out, it is a very well chosen first-topic for freshmen practitioners.

Thus, this book would go well with someone who's read "A Random Walk Down Wall Street", and may have read one or two books on setting up your own trading system like "The Risk of Trading" or "Inside the Black Box". After this book, and after a few months to a year of practice with these contracts, for the more mathematically inclined reader, they should try to take a short-course on options either at university or MOOC environment. CalTech's Options pricing might be a good place to start. Fo less mathematically inclined, there's a set of good books Wiley Finance publishes that are recommended by the author at the end of the text.

Great book, well written, although not needed, it's worth picking up a physical or ebook of this text as well, especially for beginners, as the author points out, you'll probably want to read it a few times over to make sure everything sticks. Highly recommended.

[Chase · Rating 4 out of 5]

This came recommended by a number of people as a solid beginner resource for, well, understanding options. While this book can certainly get somebody started, nearly the entire book focuses on very basic ideas in options trading. And I mean the *very* basics.

I had studied up on options a bit over the last couple months before reading this book and I did find myself feeling like it was a bit elementary. However, I believe it can be helpful for somebody who has *never* looked into options trading and doesn’t know the difference between a call and a put. (There is a short chapter near the end on advanced options strategies, though I don’t think this book prepares a brand-new-to-options reader for that chapter. I only understood it from learning the concepts elsewhere previously.)

The only *real* complaint I have about this book ( not presupposing any foreknowledge) is that it doubles up on sections explaining *how* to actually execute any options trade. In essence, if you know how to buy a box of cereal at the supermarket, you know how to buy a gallon of milk at the supermarket. Additionally, these sections did not age well at all, as brokerage firms have made it much more simple to buy and write option contracts.

Overall, read it if you don’t know a hint about options. You can also read it if you know a little bit about options, but you want to make sure you know what you think you know. However if you already have a decent fundamental grasp the differences between buying and writing calls and puts, there’s really no need to pick this up unless you need to buy a gift for someone who doesn’t.

[Hasta Fu · Rating 4 out of 5]

I listened to Michael Sincere's audiobook *Understanding Options* from Libby. It is highly regarded as an accessible, easy-to-read guide for beginners in options trading.

It explains what options are, how they work, their pros and cons, and how to use them for leverage, income generation, and risk protection. The book covers basic to advanced strategies in a straightforward style, avoiding heavy mathematics, making it suitable even for those not strong in numbers.

Two of the strategies I remember most are “Covered Calls” and “Protective Put”. He said that one of the way to earn stable income is sell covered calls for the position that you already have, it works by collecting premium if the underlying does not go up in value. The other one “Protective Put” is to minimize loss (or even to profit) in case the underlying does not keep value.

This book is quite clear and concise, with step-by-step instructions on fundamental option trades like buying calls and puts, and selling puts.

I would recommend it as the starter book on options, especially compared to other more complex texts. The book also includes updated information on spreads, the Greeks, mini-options, and trading options on ETFs, plus insights from professional traders.

[Arseniev · Rating 2 out of 5]

It’s true this book is very approachable compared to many other books about options I read. Unfortunately, the author had to sacrifice quality & depth in order to simplify it. I doubt it would be interesting to anyone with any experience in trading. Two things that I think could’ve been better.

First of all, I don’t think it is well organized. The author jumps from one place to another, from puts execution to the history of futures market, from collard to LEAPs etc. At the same time the book is very repetitive, has many similar examples and could’ve been easily cut by half.

Second, the author spent tons of time on some intuitive things, “now click the button enter” or how to open an account, but avoided the crucially important concepts such as break-even, volatility, or bid-ask spread until the very end. I can only imagine how many people suffered learning these concepts in a hard way.

Frankly, I feel it’s safer to struggle through the dry books written by professionals (maybe even give up on idea of trading options) rather than start trading following any simplified “how to” guide.

[Aaron · Rating 5 out of 5]

I had REALLY low expectations of this book being any good. It's about Options Trading. But I was surprised. Sincere does a great job of explaining in an understandable way. I really appreciate his little follow-up side notes he peppers in to reinforce previously explained concepts. I also like how he would use some terminology that seemed really confusing and follow it up with practical encouragement. comments like... "don't waste your time memorizing the strategy names because they will become obvious to you later". I would recommend this book to anyone wanting an intro to Options Trading. I also used youtube to help me further understand concepts I had a hard time wrapping my head around. Like spreads.

[Lisa · Rating 4 out of 5]

Great primer on learning options. After reading this book, I had the confidence to make my first options trade, a covered call.

This book helps the retail investor add another tool in his or her investing toolbox. I had been investing in stocks for two decades and finally decided, with encouragement from other friends, to enter the options market.

I gave four stars because this book should be split into two books: what to know before you begin buying or selling options levels 0-1, and next level trading in options, levels 2-4.

I am keeping this book in my library as a reference. I probably will never sell options at levels 2-4. I felt like the chapters related to advanced options trading were unnecessary for an introductory book and added to option-making paralysis.

[Big Game James · Rating 4 out of 5]

Even though Understanding Options by Michael Sincere purports to explain basic Options strategies to generate income, hedge, speculate, and protect stock positions, I found this book as dry and tedious as any book I've ever read. How dry and tedious? Well, it took me four years to get through this book (off and on), and I ended up more confused about trading options than when I began, especially when he got into straddles, strangles, iron condors, etc.

On the other hand, the author provides detailed information on buying and selling calls and puts and includes an informative interview with a professional options trader, Sheldon Natenberg, so I'm not saying the book is useless. It was just more tedious and repetitive than I expected. Anyway, add it all up, and it's 3.5 stars for me.

[Mick Vermeulen · Rating 4 out of 5]

Really good book for investors that want to get into options. I highly recommend reading it before trying to do any options trading, it makes clear distinctions between trading and gambling, something that fresh option traders often forget to understand. It also acts as a great setup for more advanced option books as it essentially touches all aspects of options, although the basics much more thorough than the advanced topics. In summary: a great book that any hobby trader that wants to get into options should at least have read before placing a single options trade.

[Arnold Rivas · Rating 4 out of 5]

Very good options for beginners and intermediate level traders

I’ve been trading options for about 7 yrs and this book was a great tool to review the concepts and all advanced strategies (some I don’t use very often). Not to deep into volatility but great book recommendations at the end to continue my education in options. Overall, I would recommend this book for sure

[Homero Sanchez · Rating 4 out of 5]

This is a good book to read for anyone just starting out options.

This book is very informative. It has all the basics you need to start understanding options. If you are looking for basic knowledge, then this book is for you. It does not get too deep into all the technical stuff.

[Nick · Rating 4 out of 5]

Very informative book that covers the basics with the main focus is understanding and using covered calls. I learned a lot but I was looking for more degenerate strategies so that I could make /r/WSB proud. This book teaches the reader that those degenerate strategies are incredibly unsafe and irresponsible, but responsibility is what my 401k is for. I trade options to buy yachts and cocaine.

[Yameen · Rating 5 out of 5]

This is one of the best books on options out there that takes a very practical approach to learning about options, great for beginners & advanced level knowledge. It is free of the fluff & excessive theory in many other textbook style books on options. Easy to get through.

I would definitely recommend to anybody getting their hands wet in trading, options or investment

[Pavan Yarapathineni · Rating 5 out of 5]

This is a good book for beginners, concepts were explained in a way anyone can understand. However, I would have loved to get the concept behind PUT options in a little more depth as to why would someone want to do this in a fundamental way and more case examples in real life would make it easy to understand the concepts. but overall, I really liked the book. Thank you.

[Christine Fields · Rating 5 out of 5]

For a first time options trader this book has really simplified the complexities of this portion of the market. Still not a master of all options, but the basic Calls & Puts have been very profitable since picking this one up and reading it. Fairly certain the more complex strategies will be much easier to understand with this book on my reference shelf!

[Kur Bol · Rating 5 out of 5]

One of the greatest books about options

Micheal Sincere has written the greatest book about options. It is written with easy language to understand. I love it. If you want to learn about options in the U.S. stock market, this is the book you need to read. I look forward to reading his next book.