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## Options Trading Strategies – Book Review – Guy Cohen, The Bible of Options Strategies

Much of the literature on options strategy trading tends to rely on mathematical formulas to determine the construction of a spread. Guy Cohen chose to use pictorial logic, even among the Greeks who were unique in a particular strategy, to connect the legs of a spread with diagrams.

Interconnecting diagrams are a more intuitive way of learning for those less inclined to numerical formulas. However, the logic of mathematics remains strong and intact.

The layout of the book makes it easy to navigate around the text. In addition to the strategies listed in the chapter and page there is a reference to the main strategy category with sub-categories, namely:

- Skills: Novice, Intermediate, Advanced and Expert traders.
- Direction: Bullish, Bearish and Direction Neutral.
- Volatility: High Volatility and Low Volatility.
- Risk/Reward: Limited Risk, Uncapped Risk, Limited Reward and Uncapped Reward.
- Type: Income and Capital Gain.

Guy Cohen has extensive experience in derivatives and stock markets in the US and UK. He specializes in trading and analytics applications from real estate to derivatives and has developed comprehensive business, trading and training models, all expressly designed for maximum user-friendliness.

There are enough reader reviews on Amazon and Google Book Search, to help you decide if you should get the book. For those who are just starting or about to read the book, I’ve summarized the core concepts of the larger and more important chapters to help you get through them more easily.

The number to the right of the chapter heading is the number of pages contained within that chapter. This is not the page number. The percentages represent how much each chapter is in the 302 pages in total, excluding the appendices.

1. The Four Basic Options Strategies. 20, 6.62%. 2. Income strategies. 68, 22.52%. 3. Vertical Spreads. 30, 9.93%. 4. Variation Strategies. 56, 18.54%. 5. Sideways Strategies. 44, 14.57%. 6. Leveraged Strategies. 20, 6.62%. 7. Synthetic Strategies. 54, 17.88%. 8. Taxes for Stock and Options Traders. 10, 3.31%.

Focus on chapters 2, 4, 5 and 7, which make up about 74% of the book. These chapters are relevant for practical trading purposes. Here are the key points for this chapters focus, which I have summarized from the perspective of a retail option trader.

**Chapter 2: Profit Strategies.** These strategies establish spreads where part of the spread sells Theta as a premium for a shorter term (usually 30-45 days), to collect income. Overall this strategy can result in a Net Debit or Net Credit spread. There are 13 types of spreads in this category: Covered Call, Short (Naked) Put, Bull Put Spread, Bear Call Spread, Long Iron Butterfly, Long Iron Condor, Covered Short Straddle, Covered Short Strangle, Calendar Call, Diagonal Call, Calendar Put, Diagonal Put and Covered Put (aka Married Put).

**Chapter 4: Variation Strategies. ** These strategies use spreads regardless of price direction, as long as the price breaks out of the range. For a given price burst, the order of the spread should rise for a Net Debit spread and fall for a Net Credit spread. There are 11 types of spreads defined in this category: Straddle, Strangle, Strip, Strap, Guts, Short Call Butterfly, Short Put Butterfly, Short Call Condor, Short Put Condor, Short Iron Butterfly and Short Iron Condor.

**Chapter 5: Sideways Strategies.** These strategies include non-directional spreads, which require that the price drift within a limited range. As the price remains bound to the range, the volatility of the spread should rise for a Net Debit spread and fall for a Net Credit spread. There are 11 types of spreads in this category: Short Straddle, Short Strangle, Short Guts, Long Call Butterfly, Long Put Butterfly, Long Call Condor, Long Put Condor, Modified Call Butterfly, Modified Put Butterfly, Long Iron Butterfly and Long Iron Condor .

**Chapter 7: Synthetic Strategies**. Synthetic strategies simulate the risk profile of a stock, futures or other option position by combining calls, puts with or without the stock. Although common, most synthetic positions are long or short stock. If you have a 401K plan or long-term employee stock purchase plan, it might make sense to consider synthetic strategies, since you’re long Delta. There is infinite risk for some synthetic spreads, regardless of whether the strategy involves a stock or not. There are disadvantages to using synthetics. 12 types of spreads are defined in this category: Collar, Synthetic Call, Synthetic Put, Long Call Synthetic Straddle, Long Put Synthetic Straddle, Short Call Synthetic Straddle, Short Put Synthetic Straddle, Long Synthetic Future, Short Synthetic Future, Long Combo, Short Combo and Long Box.

From the perspective of a retail option trader, I prefer to build positions without using stock. Using stock synthetically in a position makes each trade more capital intensive than necessary. Especially, if your trading account is below USD $50,000. The use of stock to configure these positions does not add material merit to risk control and there is no additional monetary benefit to tying up available trading capital in a stock-dependent synthetic position that can be achieved ot without using stock. As an options trader in the first place, you want to do as little as possible with the stock itself, except to configure the necessary option position around the underlying product, which can be replaced by an Index that is settled. of money instead of a stock-settled Index.

Of the total of 56 strategies covered in the book, I narrowed the list down to 35 Limited Risk Spread types that do not necessarily include the stock as part of its original construction. Limited Risk means there is a cap on the maximum loss – “Capped Risk” is the term used in the book. This should always be the starting point of any strategy you choose to implement. Don’t just look at the unlimited profit (Uncapped Reward) part of the strategy without realizing that there is an unlimited loss (Uncapped Risk) part of the same strategy.

**Limited Risk Spread with “Unlimited” Reward and their Directional view.**

1. Call Call. Bullish.

2. Long Put. Bearish.

3. Set the Ratio Back spread. Bearish; reverse the Bullish.

4. Call Ratio Back spread. Bullish; bearish reverse.

5. Straddle. Indifferent/ – Neutral.

6. Stunned. Indifferent/ – Neutral. 7. Undress. Bearish.

8. Tie. Bullish.

9. Courage. Indifferent/ – Neutral. 1-9 are Debit spreads: IV should increase.

10. Bull Put Ladder. Bearish. 10-11 is Credit spreads: IV should fall.

11. Bear Call Ladder. Bullish.

**Limited Risk Spreads with Limited Reward and their Directional view.**

12. Bear Put the Spread. Bearish.

13. Bull Call Spread. Bullish.

14. Long Call Calendar. Bullish; Indifferent/ – Neutral.

15. Long Put Calendar. Bullish; Indifferent/ – Neutral.

16. Long Call Butterfly. Indifferent/ – Neutral.

17. Long Put Butterfly. Indifferent/ – Neutral.

18. Long Box. Indifferent/ – Neutral.

19. Long Call Condor. Indifferent/ – Neutral.

20. Long Put Condor. Indifferent/ – Neutral.

21. Long Iron Butterfly. Indifferent/ – Neutral.

22. Long Iron Condor. Indifferent/ – Neutral. 12-22 is Debit spreads: IV should increase.

23. Bear Call Spread. Bearish. 23-35 is Credit spreads: IV should fall.

24. Bull Put Spread. Bullish.

25. Short Iron Butterfly. Indifferent/ – Neutral.

26. Short Iron Condor. Indifferent/ – Neutral.

27. Diagonal Call. Bearish.

28. Diagonal Put. Bullish.

29. Modified Call Butterfly. Bearish in – Neutral.

30. Modified Put Butterfly. Bullish to – Neutral.

31. Short (Nude) Put. Bullish.

32. Short Call Butterfly. Indifferent/ – Neutral.

33. Short Call Condor. Indifferent/ – Neutral.

34. Short Put Butterfly. Indifferent/ – Neutral.

35. Short Put Condor. Indifferent/ – Neutral.

Besides the 35 Defined Risk Spreads that do not require stock as part of their original construction for entry, there are 6 Defined Risk spreads that require stock to configure their positions. The 6 positions that I intentionally left out of the list above are Long Call Synthetic Straddle, Long Put Synthetic Straddle, Synthetic Call, Synthetic Put, Collar and Covered Call.

In conclusion, for new to intermediate traders do not be overwhelmed by the 56 strategies in the book. It’s titled the “Bible of Options Strategies” for a reason. What is important is to get a deep understanding of Long Call, Long Put, Short Call, Short Put, Long Vertical Call/Put, Short Vertical Call/Put and the Long Calendar Call/Put. Those are the 4 Basic Options Strategies, plus the Vertical and the Calendar – the only 2 strategies that floor traders define as true spreads. Other combinations are a mixture of basics with or without stock.

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