Glenn: Excellent Post! Thank you so much for your thoughts...
The 90% equity/interest : 10% options rule is fundamental. Given a (pre-tax) return of ~10% on the equity/interest-bearing instruments, such an options trading discipline can not lose money. As you pointed out, this would require $50,000. capital to have the (typical) $5,000. minimum for an options trading account. If we then diversify the options trades, required capital becomes ~$200K.
The implication here is, that if one does not have the necessary $$$ for a fully-diversified, classical 90:10 options trading strategy, one should not then sacrifice diversification; Rather, take smaller positions, and employ compounding to partially off-set the concentration of leverage one has with a larger capital base.
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The McMillan book you cited...
McMillan, Lawrence G.: Options as a Strategic Investment, 3rd Edition,
New York, New York Institute of Finance, 1992.
...can be ordered directly from McMillan Analysis: +1 (800) 724-1817
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There is a document about Options trading called, Characteristic Risk of Options... available for download (in .PDF format); it can be obtained from cboe.com ...which also has a tutorial.
A very interesting tutorial is available from a site in Switzerland:
finance.wat.ch
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-Steve |
