Book Review - Options Trading: The Hidden Reality

Written on June 2, 2008 by OptionsRopeaDope

This next book is considered a classic when it comes to option strategy. Nearly every serious option trader learning from home comes around to this book sooner or later.

This book is a revised and expanded version of two of Cottle’s earlier works which gained him alot of fame, “Options: Perception and Decption,” and “Coulda Woulda Shoulda.” “Perception and Reality” is considered a collector’s item by many people (it was published by McGraw-Hill for a short time, now it is out of print) and you can find copies on Ebay and through used booksellers on Amazon for $140+. PDFs of “Coulda Woulda Shoulda” used to be available for free from what I understand (to new customers of Think or Swim) and you can still find a copy floating around online if you look hard enough. This new book packs some more information though and is worth every penny.

The two biggest things that set this book apart from just about all others are the the emphasis on understanding synthetics (the book’s first chapter goes deeper into this than any other I’ve seen) and the many, many tales of actual trades of all types that went right, and went wrong, that support just about every point made in the book. There’s a sense it was written for market makers, so a lot of time is given to discussion of boxes and conversion/reversals and situations you’d only encounter on the floor, such as dissecting a large inventory of options from strikes and expirations as a market maker may own, but it’s clear to the reader that if you don’t understand all the intracacies of those trades then you might not be ready to jump in the deep end of the options trading pool.

Of course, there are also many chapters devoted to verticals, calendars, butterflies, skews (all 3 kinds), greeks, all with many 3D graphs that show the impact on a position from many different market forces. All through the book there’s too many nuggets of wisdom and explanationof professional option trader terms to keep track of, and I find myself rereading different parts of this book all the time until “get flat or get flattened” and the diffence between gamma and “grammas” sink in again. If some of this sounds dry, be assured it’s not - the stories and Cottle’s writing style are quite entertaining.

Although not for an options beginner (you need a basic understading of options and knowledge of spreads and some basic strategies to get immediate use from this book) it has earned its place as a must read for option income traders.

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