Contemporary Authors

• The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction Wiley (Hoboken, NJ), 2014
• A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation William Morrow (New York, NY), 2018

1. The complete book of option spreads and combinations : strategies for income generation, directional moves, and risk reduction LCCN 2014016781 Type of material Book Personal name Nations, Scott. Main title The complete book of option spreads and combinations : strategies for income generation, directional moves, and risk reduction / Scott Nations. Published/Produced Hoboken, New Jersey : Wiley, [2014] Description x, 254 pages ; 24 cm. ISBN 9781118805459 (paperback) CALL NUMBER HG6024.A3 N347 2014 Request in Jefferson or Adams Building Reading Rooms CALL NUMBER HG6024.A3 N347 2014 CABIN BRANCH Copy 1 Request in Jefferson or Adams Building Reading Rooms - STORED OFFSITE 2. A history of the United States in five crashes : stock market meltdowns that defined a nation LCCN 2017033698 Type of material Book Personal name Nations, Scott, author. Main title A history of the United States in five crashes : stock market meltdowns that defined a nation / Scott Nations. Edition First edition. Published/Produced New York, NY : William Morrow, [2018] Projected pub date 1111 Description pages cm ISBN 9780062467287 (pbk.) CALL NUMBER HB3743 .N37 2018 Request in Jefferson or Adams Building Reading Rooms CALL NUMBER HB3743 .N37 2018 Request in Jefferson or Adams Building Reading Rooms

• Options Math for Traders: How To Pick the Best Option Strategies for Your Market Outlook - 2012 Wiley, Hoboken

• Harper Collins - https://www.harpercollins.com/cr-124955/scott-nations

  Scott Nations
  Biography

  Scott Nations is the president of NationsShares, a financial engineering firm. He is a regular contributor to CNBC, where he frequently appears on-air to discuss markets, derivatives, and other investment topics. He is the author of two technical books for option traders, Options Math for Traders and The Complete Book of Option Spreads and Combinations. He lives in Chicago, Illinois.

• LinkedIn - https://www.linkedin.com/in/scottnations/

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  President at NationsShares - Creator of Option-Enhanced and Volatility Indexes.
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  Scott Nations is President and Chief Investment Officer of NationsShares. NationsShares is a leading developer of domestic and international option-enhanced investment products meant for mainstream investors as well as bespoke option-based and option-enhanced products for institutional investors. NationsShares Enhanced Covered Call and Enhanced Collar Indexes take maximum advantage of volatility premium and minimize the effects of option price erosion through the use of option skew and term structure resulting in investment vehicles superior to the covered call and collar benchmarks.

  Scott is also President and Head Trader of Fortress Trading, Inc. a proprietary trader of index options including options on the S&P 500.

  Scott appears on CNBC, the leader in business TV, as an on-air contributor. He can be seen weekly on Options Action, CNBC's show focusing on option strategies and concepts for the mainstream investor. It airs every Friday at 4:00 pm Central Time. Scott also appears on Squawk Box every Monday morning and on other CNBC shows throughout the week.

  Scott is a member of The Economic Club of Chicago. He lives in the Lincoln Park neighborhood of Chicago with his wife Wendi.

  Specialties: Proprietary index option trading, creation of option-based and option-enhanced investment vehicles. See less See less of Scott’s summary
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  A runaway computer algorithm caused the last stock market crash — and another meltdown looks likely
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• CNBC - https://www.cnbc.com/scott-nations/

  Scott Nations Scott Nations
  President and Chief Investment Officer, NationsShares
  Scott Nations is the President and Chief Investment Officer of NationsShares and a bestselling author.

  NationsShares is the world's leading independent developer of option-enhanced and option-based indexes. Scott is the creator of VolDex® (ticker symbol: VOLI), an improved measure of option implied volatility; SkewDex® (ticker symbol: SDEX), a measure of option skew; and TailDex® (ticker symbol: TDEX), the first measure of the market's perception of tail risk. NASDAQ has licensed VolDex and intends to list VolDex futures in 2017 and VolDex options in 2018.

  Scott is also the author of "A History of the United States in Five Crashes," a general interest history of the five modern stock market crashes (1907, 1929,1987, 2008 and the Flash of 2010). "A History of the United States in Five Crashes" was published by HarperCollins in June 2017. He is the author of "Options Math for Traders," published by Wiley & Sons in 2012 which was an Amazon.com best-seller on its release. He is also the author of "The Complete Book of Option Spreads and Combinations," published by Wiley & Sons in October 2014.

  Prior to founding NationsShares, Scott was a member of the Chicago Mercantile Exchange and was a market maker and floor manager for a leading S&P index option trading firm. While there he was responsible for development and implementation of a proprietary option pricing model and deployment of the first wireless handheld computers to the trading floor.

  Scott holds a B.S. from the University of Kansas and lives in Chicago, IL with his wife Wendi.

• Scott Nations - http://scottnations.com/

  About the Author
  Scott Nations is the president of NationsShares, a financial engineering firm. He is a regular contributor to CNBC, where he frequently appears on-air to discuss markets, derivatives, and other investment topics. He is the author of two technical books for option traders, Options Math for Traders and The Complete Book of Option Spreads and Combinations. He lives in Chicago, Illinois.

• Business Insider - http://www.businessinsider.com/scott-nations-5-biggest-stock-market-crashes-history-striking-similarities-2017-7

  The 5 biggest stock market crashes in history have 'striking' similarities
  Jacqui Frank and Kara Chin
  Jul. 14, 2017, 8:55 AM 21,747
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  Scott Nations, chief investment officer of NationsShares and author of "The History of the United States in Five Crashes" discusses lessons from history. Nations says the all of the modern-day crashes have some sort of a financial contraption and an external catalyst that often has nothing to do with the markets. He discusses some of the financial contraptions today that could pose a risk in the future. Following is a transcript of the video.

  Sara Silverstein: Our first guest today is Scott Nations, chief investment officer of NationsShare and the author of “A History of the United States in Five Crashes.” Very excited to be here with you. I am reading this book, reading it on Audible and the narration is pretty good, I'll say.

  Scott Nations: That's good to hear.

  Silverstein: I am most of the way through it right now. Can you tell me what the commonalities in studying the biggest five crashes in history, what you noticed or what you learned?

  Nations: Well, the reason I really wrote the book. There are several. One is the drama in each one is really incredible. It’s a little bit like the Titanic. We all know how the story ends but we enjoy reading about the story, hearing about the story.

  But the reason I wrote the book was because — the similarities between the five modern stock market crashes starting with a panic of 1907 and ending with a flash crash on May 6, 2010 — even though there's more than 100 years separating them, the similarities are really striking and the goal of the book was to point out each of the similarities and show how they happen in each of the five modern stock market crashes, potentially helping people, identifying when they show up again. Now, this is not a the-sky-is-falling book. I think everyone who has even a passing familiarity with the stock market will enjoy it but the similarities really are striking.

  We know that the stock market really gets ahead of itself before every crash. There's an old Merle Haggard song, “I only fall when I'm on the mountain.” I mean, we know that the stock market kind of tough for the stock market to crash when it's already in the trough. But there are several similarities. One is it there's always some sort of financial contraption that gets out of control. We think it solves some sort of problem but there's always a financial contraption.

  And they're also always some sort of external catalyst. They're really touch off to crash. I like to say that there's an external catalyst, often has nothing to do with finance, that pushes a market that's on the ragged edge of equilibrium in the chaos.

  Silverstein: And after studying all of this, is there anything that you’re seeing today that people should be concerned about that we’re not that we might be missing?

  Nations: It’s easy to see what’s going on at anything and think, “Oh, maybe this lines up for a crash. Maybe this is the contraption, maybe that's the catalyst.” But the I think the interesting thing is to look at the contraptions. And so for example, on May 6, 2010, the flash crash, the most recent modern stock market crash — the contraption if you will was algorithmic trading, which had absolutely no human interaction, no human filter, or no break that a human could apply. In 1987, it was an insurance program called the portfolio insurance which was supposed to solve a lot of problems. In 2008, it was the alphabet soup of mortgage-backed securities. And so I think one thing that people should look at now — and they should do this as long as their investors is — what contraptions are poorly understood not tested under stress and might unravel when the market does interrupt a period that is stressed? And you can look at that now and potentially see that. That doesn't mean that just because there are new contraptions out there, new financial products out there, it doesn't mean that the market’s going to crash. But that’s something that people can pay attention to.

  Silverstein: And you are a financial engineering expert, you run a financial engineering firm and you talk a lot about the dangers of financial engineering — and as you mentioned just now. So looking at the products that we have right now, are there any that raise flags for you?

  Nations: Well, I’m a giant fan of ETFs. But you can imagine a situation in which some of the really ill-liquid ETFs would have a tough time providing liquidity for people who want to get out, when the stock market was really under stress. And we know, we know that liquidity disappears when people desire it most. It’s just a function of the way the stock market works. It’s one of the reasons that stocks generate over time a better return than some other asset classes. It’s because you can’t just get out just because you want to.

  I think there’s another potential contraption and that would be some of this risk parody investing. Parody meaning that there’s either some sort of leverage that’s used or people say, “You know I’m going to get out as the market starts to cascade lower.” Well, we know that that doesn’t work. We tried that in the past.

  The risk parody investing, I think, really flies in the face of common sense when it — when we think that, “Well, I'll just get out if things get bad,” because we know the market doesn't let you out.

  Silverstein: You said everything needs to have a catalyst and what kind of catalysts — what’s the commonality between the catalysts?

  Nations: The catalysts are really interesting because again, they often have very little, if anything, to do with finance.

  As an example, the catalyst for the Panic of 1907, which is the first of the modern stock market crashes, was the San Francisco earthquake of 1906. Which sucked up all of the liquidity, all of the free cash in Chicago, in New York and in London actually. And essentially all of the free money all the available money in those financial centers had to be shipped off to San Francisco to fuel the rebuilding. I mean, we have to remember that the financial center of the western half of the US had essentially been destroyed. And any money that was actually in vaults in San Francisco wasn't available. Bankers were absolutely certain that the fires that followed the earthquake meant that if they open the vaults that all that money would burst into flame, so they weren't even able to use the money that they had on hand. That liquidity crush is really what started the Panic of 1907 the next year.

  In 1987, it's interesting that we thought we were finally at war with Iran when we had the crash in October 19. We had gone to war, essentially war — our military had engaged the Iranian military the weekend before — and then we see that in 2010, rather with the flash crash, the catalyst was rioting, arson, and murder in Athens. We thought all of the Eurozone was going to come unwound.

  The problem is the catalyst of the first crash was more than a year before the crash, the catalyst for the last crash was less than a day before the crash. And that time is collapsing, so investors have very little time now to see something, an event think, that might be the catalyst and the crash.

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Nations, Scott: A HISTORY OF THE
UNITED STATES IN FIVE CRASHES
Kirkus Reviews.
(May 1, 2017):
COPYRIGHT 2017 Kirkus Media LLC
http://www.kirkusreviews.com/
Full Text:
Nations, Scott A HISTORY OF THE UNITED STATES IN FIVE CRASHES Morrow/HarperCollins
(Adult Nonfiction) $28.99 6, 13 ISBN: 978-0-06-246727-0
Can we time the market? No, but this timely book by an investment executive and CNBC contributor gives
some idea of how various the triggers for its collapse can be.The five market crashes Nations (The
Complete Book of Option Spreads and Combinations, 2014, etc.) chronicles are comparatively recent, the
first from 1907, the last from 2010. This lifts some of the predictive power from the author's argument,
since the so-called panic of 1893 was easily as severe as any of its successors, while some of the crashes of
the early republican era were similarly devastating. Even so, the overarching points are valuable. Nations
points out that investment in the market is key in moving the economy forward and that it has indeed led to
individual enrichment; he notes that a dollar invested in 1899 would have been worth nearly $157 at the
time of the 2010 hiccup. However, he adds, had we not experienced the ruinous crash of 1907, the whole
package would have been worth another $45 or so, and if we had been able to avoid the five worst days of
the ever cresting and falling cycle, then that dollar would have been worth $319.24. Nations describes some
of the mechanisms for these moments of free fall, ranging from malfeasance in the market to technical
glitches in our increasingly prevalent computer-driven trades. Interestingly, some of the market crashes, by
the author's account, were set in motion by the government's doing the right thing in restraining monopoly,
short trades, and other examples of the free market gone bad. Do what we will to avoid them, though,
crashes are a function of that market and the people who participate in them, fiscal evidence of uncertainty
and fear. As Nations also writes, though the climb back can be agonizingly slow, the market eventually
recovers. In an account with more villains than heroes, indifferently written but full of useful object lessons,
Nations concludes with the warning that for all that, "it will crash again." An eye-opening examination of
the many ways money can be made--and disappear.
Source Citation (MLA 8th
Edition)
"Nations, Scott: A HISTORY OF THE UNITED STATES IN FIVE CRASHES." Kirkus Reviews, 1 May
2017. General OneFile, http://link.galegroup.com/apps/doc/A491002773/ITOF?
u=schlager&sid=ITOF&xid=91ae11fe. Accessed 17 Dec. 2017.
Gale Document Number: GALE|A491002773
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A History of the United States in Five
Crashes: Stock Market Meltdowns That
Defined a Nation
Publishers Weekly.
264.17 (Apr. 24, 2017): p82.
COPYRIGHT 2017 PWxyz, LLC
http://www.publishersweekly.com/
Full Text:
A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation
Scott Nations. Morrow, $28.99 (304p) ISBN 978-0-0624-6727-0
Nations (The Complete Book of Option Spreads and Combination), a CNBC contributor, offers a
fascinating look at five major stock market crashes: the Panic of 1907, Black Tuesday, Black Monday, the
Great Recession, and the Flash Crash. Nations observes that stock market crises mean more than just
tanking investment accounts. They also stop people from investing, impacting job availability and the
economy as a whole. While these failures don't have a single cause that is easy to recognize beforehand, he
asserts that all five studied here share important indicators. For one, they all had an external catalyst. He
connects the Panic of 1907 to the 1906 San Francisco earthquake, which spurred insurance claims
predominantly held by British insurers, causing a global bump in interest rates. Nations goes into equal
depth on each case study, sharing stories such as that of Angeliki Papathanasopoulou, a pregnant bank
employee in Athens killed in 2010 by rioters venting anger over the Greek debt crisis, which then triggered
the Flash Crash. Nations's focus on underlying causes is uniquely helpful given the complexities of the
ever-changing and intricately connected global economy. (June)
Source Citation (MLA 8th
Edition)
"A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation."
Publishers Weekly, 24 Apr. 2017, p. 82. General OneFile,
http://link.galegroup.com/apps/doc/A491250863/ITOF?u=schlager&sid=ITOF&xid=f52b4f3a.
Accessed 17 Dec. 2017.
Gale Document Number: GALE|A491250863

"Nations, Scott: A HISTORY OF THE UNITED STATES IN FIVE CRASHES." Kirkus Reviews, 1 May 2017. General OneFile, http://link.galegroup.com/apps/doc/A491002773/ITOF? u=schlager&sid=ITOF. Accessed 17 Dec. 2017. "A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation." Publishers Weekly, 24 Apr. 2017, p. 82. General OneFile, http://link.galegroup.com/apps/doc/A491250863/ITOF?u=schlager&sid=ITOF. Accessed 17 Dec. 2017.

• Investing.com
  https://www.investing.com/analysis/book-review:-scott-nations%27-options-math-for-traders-145921
  Word count: 715

  Book Review: Scott Nations' Options Math For Traders
  By Brenda JubinMarket OverviewDec 03, 2012 05:45AM ET

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  Scott Nations, probably best known as a contributor to CNBC, is a trader and a financial engineer. Both of these skills are evident in Options Math for Traders: How to Pick the Best Option Strategies for Your Market Outlook (Wiley, 2012). I should say up front, however, that this book is not for the reader in search of lots of formulas. Even the appendix has formulas for only such basic concepts as standard deviation, realized volatility, linear interpolation, and annualizing yield. The text itself has but a single formula—the Black-Scholes pricing model. In brief, it is a book for “the rest of us.”

  The primary themes of the book are volatility, skew, time decay, and the bid/ask spread. The strategies analyzed are covered calls and their synthetic equivalent selling puts, calendar spreads, risk reversal, and vertical spreads.

  In this post I’m going to focus on a single chapter—vertical spreads—to illustrate how Nations brings the threads of his book together. I’m offering mere snippets out of context. If the excerpts I quote are not intelligible, it’s not the author’s fault (Nations is a clear writer) but the result of my overly aggressive scissors.

  Nations uses vertical spreads to get bearish exposure to the underlying. Why bearish? Because skew works against bullish vertical spreads. As examples, he takes a 180/200 put debit spread and a 210/230 call credit spread. “In both the put spread bought and the call spread sold, skew generated a net benefit. There would certainly be other phenomena that would be helping or hurting these trades. The volatility risk premium would be helping the call spread since our trader would likely be selling the 210 strike call for more than it was worth, and that benefit would probably overwhelm the damage that the volatility risk premium would do to the profitability of the 230 strike call option bought. Time decay would also likely help the profitability of the call spread, since the daily erosion received from the call our trader is short (the 210 strike call) is going to be greater than the daily erosion paid on the option our trader is long (the 230 strike call).” (p. 219) By contrast, the profitability of the put spread will likely be hurt by the volatility risk premium and time decay.

  How does one determine whether a vertical spread is expensive or cheap? A reasonable way to go about this is to compare the cost of the spread to the width of the spread, taking into consideration how close it is to being at-the-money. If, for instance, a put spread costs $3.30 and the spread is $20 wide, the spread would cost 16.5% of the width of the spread. This ratio is “pretty inexpensive given that one strike is so close to at-the-money.” (p. 226)

  And how good a hedge is one leg of the spread for the other? “As vertical spreads get wider each option is a less effective hedge for the other option…. As a vertical spread gets wider, the option that is closer to at-the-money starts to act more like an outright option rather than as part of a spread.” (p. 229)

  A last take-away: “Skew tends to generate a much smaller benefit for short call spreads than for long put spreads; the difference in implied volatility is lower for call spreads. … The result of selling the strike price that is in the ‘trough’ of the skew curve is that every possible call spread using that strike as the short strike is worse off because of skew.” (p. 232)

  If these excerpts whet your appetite, I can heartily recommend Options Math for Traders. No, it doesn’t cover straddles and strangles and wing spreads. But once you understand calls and puts and vertical spreads, you’re a long way toward grasping these other strategies. Moreover, Nations does a very good job with calendars, which I personally consider one of the toughest option spreads to trade well. It’s an “in the trenches” book and as such could be of great help to the intermediate options trader.

• Wall Street Journal
  https://www.wsj.com/articles/the-market-in-nosedive-1498518080
  Word count: 1059

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  BOOKS BOOKSHELF
  The Market in Nosedive
  In the “flash crash” of 2010, shares gyrated between $1,000 and a penny, recovering minutes later. Other market meltdowns lasted longer. Charles R. Morris reviews “A History of the United States in Five Crashes” by Scott Nations.
  The New York Stock Exchange on October 19, 1987.
  The New York Stock Exchange on October 19, 1987. PHOTO: AGENCE FRANCE-PRESSE/GETTY IMAGES
  By Charles R. Morris
  June 26, 2017 7:01 p.m. ET
  29 COMMENTS
  The market collapse of 2008 remains a vivid memory today, not least for investors who are still trying to recover. For Scott Nations, a Chicago-based financial engineer, it is but one of a series of meltdowns that have periodically shaken the country’s financial stability. In “A History of the United States in Five Crashes,” he provides crisp profiles on the crashes in 1907, 1929, 1987 and, yes, 2008, along with the 2010 “flash crash”—all in a lean, drive-ahead writing style that is a pleasure to read.

  His account of the 1907 crash opens with Teddy Roosevelt’s attempts to impose rules of competition on the country’s enormous business combinations. Railroad and copper wars were an unbridled spectacle of greed, even as the economy was rattled by the colossal 1906 San Francisco earthquake. Mr. Nations generally argues from the premise that, in nervous times, underlying imbalances are turned into catastrophic tsunamis by the mediation of a “financial contraption.” The contraption of 1907 was the trust companies, ostensibly staid entities that administered trusts and wills. The more adventurous ones gradually added deposit-taking and lending services.

  Since trust companies had no reserve requirements, they had a cost advantage over conventional banks, which some exploited to the hilt. Foolish lending on paper-thin reserves created a string of trust-company insolvencies that threatened to engulf both the regulated banks and the New York Stock Exchange, setting the stage for the heroics of J.P. Morgan. Ill and turning 70, he peremptorily summoned leading bankers to his library and masterminded the capital infusions that ended the crisis.

  Mr. Nations ascribes the 1929 market debacle primarily to the policies of the Federal Reserve, particularly those of Benjamin Strong, the imposing president of the New York Fed, who Mr. Nations believes fueled the stock-market bubble by easing interest rates in the mid-1920s in order to help Britain return to the gold standard. (Depression scholars still debate the question.) The “contraption” driving the 1929 crash was the investment trust, effectively a mutual fund that sponsors had “bulled” by means of insider trading, driving trust valuations far above that of the individual securities in the portfolio.

  The Market in Nosedive
  PHOTO: WSJ
  A HISTORY OF THE UNITED STATES IN FIVE CRASHES
  By Scott Nations
  William Morrow, 336 pages, $28.99

  When the market finally broke, Mr. Nations tells us, the Stock Exchange closed its public gallery after “visitors watched a trader run screaming from the floor.” A physician at the exchange reported treating traders for the shell-shock symptoms he had treated in World War I. Although Mr. Nations’s account of the crash is excellent, he makes little attempt to connect it to the world depression that followed.

  The market crash of 1987 occurred when markets were still working off the leveraged-buyout boom and other excesses of the 1980s. Two academics, Hayne Leland and Mark Rubinstein, came up with algorithms for hedging stock-market risk by selling offsetting options on the Chicago Mercantile Exchange. The catch was that they could only be implemented by computers. As the idea spread, it acquired the name of “portfolio insurance” and was catnip to big investors.

  During the second week of October 1987, falling markets triggered the “insurance” algorithms, launching wave after wave of option sales in Chicago. Alas, there weren’t enough options in the world to meet the flood of orders. “Black Monday,” Oct. 19, saw the steepest one-day drop in history. But it is hard to point to any damage to the economy. From 1986 through 1989, real U.S. growth came in at a boringly steady 3.5%, 3.5%, 4.2% and 3.7%, relegating the 1987 crash to a sideshow.

  The episode that may best fit Mr. Nations’s paradigm—underlying instability and a new “contraption”—is the Great Recession of 2008-09. By the mid-2000s, the world had been sufficiently lulled by the Greenspan-Bernanke “Great Moderation” to accept that the idea that wisely applied monetary policy—feeding liquidity into the economy in measured doses—could smooth the unruliest economic tides. The “financial contraption” of the day was the structured securitized bond. Banks discovered that if they sold off their loans, after collecting hefty fees they could make higher profits without tying up their balance sheets. Securitizing mortgages and business loans made good sense so long as the underlying loans were sound. But in the absence of any regulatory oversight, shoddy, often fraudulent, paper came to dominate the market and was sold all over the world, with dire effects second only to those of the Great Depression.

  Mr. Nations’s last example, the 2010 “flash crash,” is quite dramatic, but like the 1987 market crash doesn’t seem to have been especially consequential. A Kansas mutual fund with Greek exposure contracted with Barclays bank to exit a $4 billion position. Barclays had built algorithmic trading technologies for managing massive portfolio adjustments without human intervention. When Barclays switched on the trading robots in the afternoon of May 6, the stock, options and futures markets went crazy. Perfectly sound companies saw their shares gyrate between $1,000 and a penny within minutes. While estimates that as much as a trillion dollars was lost in minutes are likely true, the losses were mostly recovered a few minutes later, and the most ridiculous trades were reversed by the end of the trading day.

  One takeaway from Mr. Nations’s chronicle is that finance is a dangerous industry for the simple reason that—as we can see in each of his episodes—it employs enormous leverage. Today the biggest banks have balance sheets in the trillions, 90% of it borrowed. When the bull starts roaring, and the money is flowing, calamity is usually not far behind.

  Mr. Morris’s most recent book is “A Rabble of Dead Money,” a history of the Great Depression.

  Appeared in the June 27, 2017, print edition as 'The Market In Nosedive.'

• CFA Institute
  https://www.cfapubs.org/doi/full/10.2469/br.v10.n1.11
  Word count: 937

  Home > Book Reviews > List of Issues > Volume 10, Issue 1 > The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction (a review)
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  The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction (a review)
  The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction (2014). By Scott Nations
  John Wiley & Sons, Inc., www.wiley.com. 264 pages, $90.00.

  Reviewed by Arnold T. Davis, CFA
  Book Review Editor: Martin S. Fridson, CFA
  Abstract Full Text
  Abstract
  Providing an overview of a number of option-trading strategies, situations in which they may be appropriate, and ways to implement them, this book is geared toward equity investors with limited option-trading experience who are looking to add option-trading strategies to their investing toolkits.

  The Complete Book of Option Spreads and Combinations: Strategies for Income Generation, Directional Moves, and Risk Reduction discusses how investors can use options to achieve their investment goals, particularly when they have an underlying view on the direction of a stock and specific risk and return objectives.

  The book covers a variety of well-known option-trading strategies, including vertical spreads, covered calls, covered puts, calendar spreads, straddles, strangles, collars, and butterflies. Among the lesser-known strategies discussed by author Scott Nations—president and chief investment officer of option-based index developer NationsShares—are risk reversal, condors and iron condors, conversion/reversal, and other spreads, including ratio spreads and back spreads.

  The author’s target reader is an investor with a solid understanding of equities, a basic understanding of options, and a desire to maximize return or minimize risk on the basis of a view of future market movements. For example, a long vertical spread could be of interest to an investor who wants to benefit from a moderate upside in the stock while limiting upfront investment. In such a case, the investor would buy a call option while selling an out-of-the-money call option. The book presents a balanced view, showing that although a successful strategy can achieve the investor’s objectives, there is no such thing as a free lunch given the trade-offs between risk and return.

  The book is clearly written and logically organized. Each chapter contains an easily understandable description of the securities that constitute a particular investing strategy, with both a graphical view and a detailed explanation of the strategy. There is also an in-depth explanation of how to implement each type of trade, possible outcomes, and expected risks and returns. Each chapter concludes with a useful summary that outlines the key points.

  One of the book’s strengths is the abundance of ideas that it presents for the active investor’s consideration. Nations lucidly explains how to turn a point of view into a trading position through a combination of options. The attentive reader will come away with a solid knowledge of these trading strategies.

  The Complete Book of Option Spreads and Combinations addresses the underlying drivers of value for options in an intuitive manner for the nonquantitative investor. For example, it explains at a high level both volatility and the time value of money and how they can affect the profitability of a trade. Readers are directed to the author’s website to calculate option prices, but quantitative investors may find themselves looking for more technical explanations of options.

  Although not explicitly stated by the author, the book pursues a middle course between active management, which assumes investors can outperform the market, and efficient markets, which are likely to price options in a reasonably fair manner. For instance, Nations explains why option prices can vary from their theoretical prices, as in the case of the implied volatility of out-of-the-money options, and how demand for options can affect their prices.

  At a theoretical level, the risks and potential payoffs of each strategy are fairly presented. To some extent, however, the book downplays the difficulty of successfully implementing these strategies in practice. For example, some readers might find that they have incurred substantially more risk than they were expecting because they lack the trading experience and discipline to maintain the strategies effectively as the market moves. The field of behavioral finance has demonstrated that investors are subject to psychological forces that often drive decision making that is ultimately not in their best interest. Thus, the actual trading results of a reader who follows the strategies described in the book could differ substantially from the theoretical outcomes that the author presents. In addition, as the book points out, investors who are wrong about the direction of a security can incur significant capital losses.

  Although the material is carefully thought through and well presented, much of it can be found in other sources. Given the book’s price of $90, some readers may decide to obtain similar information at far less cost.

  In summary, for investors who want to learn more about option-trading strategies, The Complete Book of Option Spreads and Combinations presents a good overview of the subject, with a number of trading strategies that investors can use to help them achieve their desired outcomes.

  —A.T.D.

  Reviewer Information

  Arnold T. Davis, CFA, is an executive at Accenture, Chicago.

  Book Review Editor Information

  Martin S. Fridson, CFA, is chief investment officer at Lehmann, Livian, Fridson Advisors, LLC, New York City.

  Related Topics

• Investing.com
  https://www.investing.com/analysis/book-review:-the-complete-book-of-option-spreads-and-combinations-233516
  Word count: 458

  Book Review: The Complete Book Of Option Spreads And Combinations
  By Brenda JubinMarket OverviewNov 24, 2014 05:18AM ET

  Brenda Jubin
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  If you trade options, you’d do well to have Scott Nations’ Complete Book of Option Spreads and Combinations (Wiley, 2014) in your reference library. It’s an intermediate-level book that explains the structure of more spreads than most people will ever trade but that they should understand nonetheless. A case in point: a conversion or a reversal, a combination that is rarely executed as a package but that “a smart retail trader might end up having on.” (p. 209) It’s better to know in advance what this position is and how to deal with it.

  There’s an abundance of information available online about option spreads and combinations, and Nations of necessity covers much of the same territory. But he proceeds more analytically, and he deals with issues that most online descriptions ignore, such as ways to mitigate wide bid/ask spreads. Take, for instance, the long call condor. Nations looks at an AAPL call condor that, using midpoint pricing, costs 18.87 and that, buying on the ask and selling on the bid would cost 0.63 more. What if we were to replace the in-the-money call spread “with something that’s out-of-the-money and has bid/ask spreads similar to the bid/ask spreads of these other out-of-the-money options?” That is, what if we sold a put spread with the same strikes instead of buying that call spread—and again sold at the bid and bought at the ask? Instead of paying a 0.63 penalty, we now pay only 0.27. This “new, magical structure” is an iron condor. (pp. 201-202)

  In eleven chapters this book deals with vertical spreads, covered calls, covered puts, calendar spreads, straddles, strangles, collars, risk reversal, butterflies, condors and iron condors, and conversion/ reversal. Every strategy is encapsulated in cheat sheets and, more importantly, is illustrated with examples, complete with tables and figures. Here, for instance, is the graph of a vertical spread he analyzes, which includes the probability of profitability—something he explains how to calculate on the previous page.

  Stock PricesStock Prices
  Unlike Nations’ previous book, Options Math for Traders, this one is math-lite. He confines his discussion of option pricing to a single chapter and refers the reader to his website Option Math to download a free spreadsheet that calculates theoretical option values using the Black-Scholes model and inputs supplied by the user.

  But it provides an excellent conceptual framework for understanding spreads and combinations. With the help of this book the reader can progress from being a trader who uses options to an options trader.

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