Using Options to Buy Stocks: Build Wealth With Little ... (ISBN 0793134145)

One idea explored throroughly:
I saw this book in the book store, and spent some time there reading the first few chapters. I was so interested in his ideas, that I purchased the book. It's well-written and not at all dry, unlike some other investment books. The author starts off by telling us how he had been able to amass a decent-sized portfolio over the years. He had a couple of hundred thousand dollars saved away, all invested in good long-term stock investments. He wished there was a way he could generate more income on-top of his already solid investments. He started out by selling covered calls on some of his stock portfolio. That worked for a while, but he soon became frustrated that some of his best performing stocks were being called away, while he was left with a portfolio of poorly performing stocks. That is one of the down sides to covered call investing. So he tried selling put options instead. Selling a put option is when you promise to purchase a stock at a specific price. In exchange for this promise you get paid a premium up front. The author has found a lot of success picking solid companies, with sales and earnings growth, and selling put options one or two years out (LEAPs). Most of the LEAP puts he sells expires worthless, thus allowing him to keep the premium as profit, and sell some more long-term puts for more premium. Most of the book deals with his back-testing data for this theory. He tests different quality stocks, different expiry dates, and different strikes. All in an effort to find the best overall results. In the end, some of his data suggests that selling long term puts at a strike price below the current price on the highest quality stocks has a 95% plus success rate. If this type of theory interests you, I suggest getting this book and studying the theory and data for yourself.

Too Much Theory, Not Enough Real World!!:
I picked this up ... at a book clearance sale, if you have to pay more pick another title. First of all the author says he sells puts (contracts agreeing to buy a stock or index at a set price until a specific date for which you receive a premium) to buy stocks in his investment account. There is not a single example in the book of a trade he executed this way. Instead he fills about 1/4 of the book with hypothetical computer runs assuming you had sold every LEAP contract over a multi year period. That is just a silly example for the individual investor. That is akin to comparing all of the insurance coverage written by Prudential with you writing a policy on your grandma. Second he gives you numerous pages on how to calculate Volatility and Black-Scholes, etc. What is missed is that you want to be selling Puts and Calls when Volatility is High, and most option brokers do this calculation with a computer. As for Black-Sholes, the calculation is easy to find on the web, but any "advantage" that it may provide is used by insititutions who can rapidly scan the whole market and quickly correct any price imbalances. Unless you enjoy crunching financial formulas by hand, this section is filler at best. Finally, his stock selection and risk control methods are questionable at best. Think Enron and realize that even "independent" reviewers like Morningstar and Value Line had it well rated up until the bitter end. If you dont already have a solid stock picking methodology, you should not start buy selling options. The notion that a reader should do anything other than sell an option that is 100% covered by CASH is the same as endorsing the methods that bankrupted many very large traders, banks and hedge-funds. If you are looking for investment ideas Getting Started in Options may be a good place to START. Throw in Peter Lynch, Justin Mamis, and Andrew Tobias for good measure.

This is an important book:
I trade equity options. I have read a lot of books about options. Basically, once you have read McMillan's book, none of the other option books have anything to add. Except this book. This book shows some original thinking; it's not just the same old thing about bull spreads, etc. The book advocates more than just selling puts to get premium or to use as a method of buying stock at a discount. He explains how you can sell puts on solid companies and buy stock of other companies with the premium you brought in. He really got me thinking, and I have gone from his ideas to developing some of my own. This book is well worth reading. Read it to get ideas on how to use puts for your own advantage. Learn something new.

Outstanding book on long-term put strategy:
In his book, Dennis Eisen describes exactly one way to trade options: Selling Puts, namely LEAPS (Long-term Equity Anticipation Securities). What makes this book so interesting to read is that Eisen starts with a general overview and then goes into a level of useful detail which I have not seen in any other book on options yet. He explains how options are taxed, how the margin requirement is calculated, and what actually happens when options are exercised/assigned. This knowledge you normally have to acquire in years of practice but Eisen just spreads it out in front of the reader. Despite the level of detail the book is easy to follow, and I finished it in two days. What makes the author very likable is that he writes in the "I" form, i.e. he writes from his experience, and not with the claim to know the absolute truth. The book is divided in three main parts: Part one covers the basics, part two takes a quantitative look at the risk and reward of an actual system, and how you can improve your odds, and part three lists formulas and computer codes. There is also a big appendix with over a hundred tables of put premiums calculated with the Black-Scholes-Formula. The book is rounded off by a bibliography and Eisen's favorite web sites (some of them are outdated). The main reason why Eisen prefers long-term puts (and long-term meaning up to 30 months) is that they are less risky. Due to inflation and the fact that good companies increase their earnings over time thus driving their share price up, he feels that long-term options are less likely to be assigned. For this, he is willing to sacrifice quite some put premium as the following example shows: For an American Option (stock price = strike price, volatility 0.3, dividend rate 3%) the premium for a 15 months-put is $11.46 yet for the 30 months-put it is only $15.06. In other words, although the time is twice as long until expiration, the premium increases by only 31%. In proportion, the premium for a 6-months-put is even higher, at $7.71. This is because options lose most of their value in the last months before expiration. Here I would deviate from the author's system, I would always prefer to sell two consecutive 15-months-puts for $22.92 or even five consecutive 6-months-puts for $38.53 rather than one 30-months-put for $15.06. By rolling them out and down I would try to prevent being assigned too many stocks. Are there any downsides to this book? Not really. One thing I did not understand is how Eisen can put the premium which he earns into a cash market account at 6% interest rate. (This contributes an important part to the profitability of his system). In chapter 4 he explains how much margin is required: The whole put premium plus 10 or 20% of the underlying stock price. So how can he put the premium into a cash market account when he has to keep it as a margin? My online broker will give me less than 1% on my margin account. And one thing I would be looking forward to: Since this book was written in 2000, it could use an update. Then Eisen could test his strategy with a longer history and real data (he had to calculate backdated data because LEAPS had only been existing for seven years at the time this book was written), and update some of the web sites and bibliographic data. But altogether this is a great book, and it deserves five stars.

A very good book about options and specifically about LEAP puts:
I really enjoyed reading this book. First, it's very condensed and well structured. The author gives a very good overview of stock options, then he explains his strategy (basically it's selling long term naked puts). Because in general selling naked options is considered to be risky, the author explains in details why his strategy is actually a low risk one. He includes the raw data he used, the programs and formulas and the results and their interpretation. The books is written from an individual investor point of view. What I really like about the book is that the author is not trying to avoid or downplay the areas of concerns. Actually he is doing exactly the opposite. He is trying to find and address the weakest points of his strategy and prove his points. Overall, it's a great book to learn about stock options, especially the LEAP puts strategy.