Options Trading: The Hidden Reality by Charles M Cottle

The text was primarily aimed at professional market makers but it was a hit within a small crowd of sophisticated private options traders as well. In the meantime Cottle wanted to supply clients of his brokerage firm with a text they could use to educate themselves about options trading. To that end he obtained permission from his publisher to release some of the material in Options Perception and Deception in more simplified format. That book was called ‘Coulda Woulda Shoulda’ and it became a huge success among the option trading public. What made the text so unique was Cottle’s ability to demonstrate complex option theory using real world examples won during years as an options trader on the floor of the CBOT.

The Risk Doctor Returns

Now Cottle is back with a new publication called ‘Options Trading: the Hidden Reality’, a revised and expanded edition of his first two books Options: Perception and Deception and Coulda Woulda Shoulda.

The book contains an enormous wealth of information about option trading and will likely become the hand book of choice for professional and retail option traders alike. It kicks-off with a chapter on synthetics showing how the true nature of an option position, with all its risk and opportunity, can be made even easier to comprehend by viewing it in terms of its synthetic equivalent. Cottle tells the story of a trader who was contemplating a covered write position but did not know if it was the strategy for him at the time. Cottle asked if he would consider writing a naked put. The trader was quick to answer that he would never write puts naked. But as Cottle points out, a naked put is the exact same thing as a covered write; a revelation not only to the trader in the story, but certainly to many readers as well.

The chapter continues with a demonstration of how to dissect positions by “carding them up”, the same way the floor traders used to do it at the exchanges. This is an incredibly valuable technique that helps a trader understand the risk of a position no matter how convoluted it has become and helps him to determine the measures required to eliminate unnecessary risk. This chapter alone will put many options traders light years ahead of where they are now.

The book goes on to cover the art of position adjustment, exploring option pricing by digging into the so called “Greeks”, and discussing basic option positions such as strangles and straddles as well as vertical spreads. It moves on with detailed discussions of more advanced strategies such as wingspreads, jelly rolls, double diagonals, time spreads, box spreads, sling shots, you name it; if it can be done with options, its in here. Readers familiar with Cottle’s first two books will ask
what distinguishes this new release from the previous publications. Firstly it is printed in colour and contains 100 more pages, featuring among other things dissection illustrations on popular wingspread (stretched-out condors, slingshots and skip-strike-flies) and calendarised spread (double diagonals, straddle strangle swaps and double calendars) configurations. It also contains a colour version of the well liked 3D graphics and the Skew Library featured in Options: Perception and Deception. The diagrams used are very nicely done and serve well to explain some of the more complicated material. In other words this book has everything going for it the first two books had, as well as much more. It also helps to know that the earlier books are no longer published and are difficult to find and/or very costly.

Look Before Jumping

Options Trading: the Hidden Reality is not for beginners just getting acquainted with options. In the book’s foreword, Cottle says readers should have an understanding of basic options strategies and concepts such as in-, at-, and out-of-the-money, strike, premium, time value, intrinsic and extrinsic value, bull and bear spreads, butterfly, strangle, straddle, back spread etc. Indeed the first chapter pulls no punches in its discussion of synthetics. Even those already versed in the basics should be prepared for a roller-coaster-ride discussion with the agile mind of an options trading genius. You may find yourself reading over the text many times before it begins to sink in, but when it does be prepared for flashing light bulbs.

One alternative way to crack this book is by beginning with the foreword and then skipping directly to chapter 11, Option Dialogue before returning to the rest of the book. Here Cottle presents a series of email exchanges with a floor trader he was mentoring back in the 1990s. The exchange is interesting because it presents a new trader faced with all the decision making uncertainties that all traders experience when starting out with options. The exchange develops as the trader begins executing more complex trades asking and receiving Cottle’s expert advice along the way; a great insight into the world of professional options trading and a good way to familiarize yourself with the jargon and thought processes that go along with it.

Summary

Most (above all new) option traders focus on making the big bucks. They see the leverage options offer and wrap themselves in the misconception of limited risk. Then they jump right into the markets only to have their dreams dashed on the rocks of reality. But Cottle, the Risk Doctor, is here to help traders with a steady diet of risk perceptions and strict avoidance of risk deception. If you are serious about trading options, get this book!