xiii
IntroduCtIon
You have a tremendous advantage over algorithmic trading models, 
investment bank trading desks, hedge funds, and anyone who appears on or 
pays attention to cable business news shows. This book is written to show 
where that advantage lies and how to exploit it to make confident and suc-
cessful investment choices. In doing so, it explains how options work and 
what they can tell you about the market’s estimation of the value of stocks. 
even if, after reading it, you decide to stick with straight stock in-
vesting and never make an option transaction, understanding how options 
work will give you a tremendous advantage as an investor. The reason for 
this is simple: by understanding options, you can understand what the rest 
of the market is expecting the future price of a stock to be. Understanding 
what future stock prices are implied by the market is like playing cards with 
an opponent who always leaves his or her hand face up on the table. Y ou 
can look at the cards you are dealt, compare them with your opponent’s, 
and play the round only when you are sure that you have the winning hand.
By incorporating options into your portfolio, you will enjoy an even 
greater advantage because of a peculiarity about how option prices are 
determined. Option prices are set by market participants making trans-
actions, but those market participants all base their sale and purchase 
decisions on the same statistical models. These models are like sausage 
grinders. They contain no intelligence or insight but rather take in a few 
simple inputs, grind them up in a mechanical way, and spit out an option 
price of a specific form. 
An option model does not, for instance, care about the operational 
details of a company. This oversight can lead to situations that seem to be 
too good to be true. For instance, I have seen a case in which an investor