Options as a Strategic Investment
Encyclopedic reference on option strategies and their payoffs.
Summary
Lawrence McMillan wrote the comprehensive reference on option strategies, running well over a thousand pages across its editions. It is organised by strategy rather than by theory, and its purpose is completeness.
The structure works through covered call writing, put buying, naked writing, spreads of every kind including vertical, calendar, diagonal, ratio and backspread, straddles and combinations, and then the same material for index options, futures options and LEAPS. For each strategy McMillan sets out the construction, the profit and loss profile, the break-even points, the effect of time decay and volatility change, the follow-up action when the position moves against the trader, and the tax treatment under American rules.
The book also covers volatility trading, arbitrage including conversions and reversals, and the mathematics needed to use the strategies, though it is not a theoretical text. Its weaknesses are its length, which makes it a reference rather than a book to read through, and the American tax and regulatory material, which dates. It is the standard desk reference for retail and professional option traders and has been kept in print through repeated editions since 1980. Readers wanting the conceptual framework should read Natenberg first and use McMillan for the specifics of a given structure.
Key takeaways 7
- Every option strategy has a determinate profit and loss profile that can be computed before the position is opened.
- Covered call writing converts an equity position into a short volatility position with capped upside, which most writers do not recognise.
- Follow-up action, meaning what the trader does when a position moves against them, matters more to results than the initial structure.
- Time decay works for the seller and against the buyer, and its rate accelerates as expiration approaches.
- Ratio and backspread positions carry unlimited risk in one direction and must be sized accordingly.
- Conversions, reversals and box spreads are arbitrage structures whose pricing enforces put-call parity.
- McMillan argues that strategy selection should follow from an explicit view on direction, volatility and time, and that positions without such a view are unmanageable.
Who should read it
Option traders who need a complete reference on the construction, risk profile and management of every standard strategy.
Where it sits in the reference 2
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