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could commit to buy a strong, profitable company for less than the amount
of cash it held—in effect, allowing the investor to pay $0.90 to receive a
dollar plus a share of the companys future profits! Although it is true that
these kinds of opportunities do not come along every day, they do indeed
come along for patient, insightful investors.
This example lies at the heart of intelligent option investing, the es-
sence of which can be expressed as a three-step process:
1. Understanding the value of a stock
2. Comparing that intelligently estimated value with the mechani-
cally derived one implied by the option market
3. Tilting the risk-reward balance in ones favor by investing in the
best opportunities using a combination of stocks and options
The goal of this book is to provide you with the knowledge you need to be
an intelligent option investor from the standpoint of these three steps.
There is a lot of information contained within this book but also a lot
of information left out. This is not meant to be an encyclopedia of option
equations, a handbook of colorfully named option strategies, or a treatise on
financial statement analysis. Unlike academic books covering options, such
as hulls excellent book,
1 not a single integration symbol or mathematical
proof is found between this books covers. Understanding how options are
priced is an important step in being an intelligent option investor; doing dif-
ferential partial equations or working out mathematical proofs is not.
Unlike option books written for professional practitioners, such as
natenbergs book,2 you will not find explanations about complex strategies
or graphs about how “the greeks”3 vary under different conditions. Floor
traders need to know these things, but intelligent option investors—those
making considered long-term investments in the financial outcomes of
companies—have very different motivations, resources, and time horizons
from floor traders. Intelligent option investors, it turns out, do better not
even worrying about the great majority of things that floor traders must
consider every day.
Unlike how-to books about day trading options, this book does not
have one word to say about chart patterns, market timing, get-rich-quick
schemes, or any of the many other delusions popular among people who
xiv •   Introduction