As a personal finance aficionado for many years, I was surprised to know little about reverse convertibles, an investment vehicle that sounds too good to be true. After reading this warning in Smart Money (and this one from FINRA) about reverse convertibles, and how they did very poorly these last few years because of the economic downturn, I thought I should know more about them, despite having no desire to ever invest in one.

I think it’s always good to be educated, even on things you probably will never use because it helps you understand the environment as a whole.

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If you want to learn about options, you can’t go wrong picking up a copy of The Rookie’s Guide to Options by Mark Wolfinger. It was a little harder to do a review of this book because I’m not an options trader, I’m not terribly interested in options, and I’ve never even opened a book about options outside of Brian Overby’s The Options Playbook for a review a while back.

Overall, the book is really comprehensive and after the first chapter, where the most basic of basics are explained, I felt like I knew enough about options to be a danger to myself. Call options, put options, wonderful… how hard could it be? If it were that easy, there wouldn’t be another two hundred pages to read!

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This is a guest post written by Mark Wolfinger of the investing blog Options for Rookies. Mark grew up in Brooklyn and in an earlier life, earned a PhD (chemistry) from Northwestern. After several years as a research chemist, in Dec 1976 he moved to Chicago to trade options. Over the next 23 years, he was primarily a CBOE market maker, but also worked as a risk manager, and coached new traders. He left the CBOE in 2000 and began a career as an educator. He’s published three books and numerous magazine articles.

Mark recently authored The Rookie’s Guide to Options and he approached me with a novel guest post idea. You don’t normally associate options with passive investing but he is going to explain how you can use options, specifically collars, to protect yourself when passive investing.

Let’s begin by agreeing:

• a) Passive investing beats active investing – for all but the few talented traders who consistently outperform the markets. Let’s also agree that none of us is a member of that elite group.
• b) The rules: allocate assets, diversify, buy and hold, don’t panic by selling into market declines etc. These are the most commonly used methods to minimize investment risk. They are constantly repeated by journalists, bloggers, brokers, financial planners and financial advisors.

Should most of us follow this advice with confidence? Do we save a portion of each paycheck, invest passively, and confidently accept whatever happens?

I vote ‘no.’

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My wife has a whole mess of underwater options with her company, issued before the economy took a nosedive, and was looking to see what her options (ha ha) were. She’ll be leaving her company in early July, to pursue graduate school in her field, and so she’ll only have sixty days after her last day to exercise the options. For the shares that are profitable, it’s a no brainer: exercise and sell. But what can she do with the rest?

She searched the internet for advice on what she could do, fully anticipating the answer was “nothing.” Then she stumbled onto a site that said she could exercise them and use the loss to offset some tax gains. She didn’t understand why that made any sense and so she asked me. I didn’t know why that made any sense either. Since she didn’t remember where she read it, we can’t be sure the advice was serious.

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These brokers are excellent for stock equity trades as well!

As you may have read in my review of The Options Playbook, I’ve started to get interested in trading stock options. As has been the case with everything I try, I do a lot of research first and then I dive right in. As my dad always said, you learn in the classroom or you learn on the street. Learning on the street is always more expensive. I prefer the classroom.

In my limited knowledge of options, it appears that there are two main discriminators: price and tools. For price, it’s a matter of comparing the cost per trade and per contract. For tools, it’s having the ability to quickly make complicated trades without having to jump through too many hoops. In my review of the Options Playbook, I talk about two types of “plays.” The more complicated plays involve several “legs,” or options trades, that hedge each other and the better options brokers let you setup those plays with one screen. In fact, most brokers make that transaction easy because it results in more trades, which means more profit, so it’s almost not even worth comparing brokers based on that (remember, I’m a total novice in this so I may be wrong).

So, it may just come down to price.

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Stock options is something that has always both intrigued me and confused me.

Fortunately, I’ve become friends with some people over at TradeKing and one of them sent me a copy of The Option’s Playbook, written by their Senior Options Analyst Brian Overby . It’s a print version of their entire options education center, available to registered users of TradeKing (sign up for free by clicking here).

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$3.95 a trade.

(Update 1/14/11: OptionsHouse recently increased their commission from $2.95 to $3.95)

That’s how much it’ll cost you to make a trade at OptionsHouse.

That’s pretty cheap. TradeKing is currently my go-to broker and they charge $4.95 a trade, 67% more than OptionsHouse. Zecco, which is free if you meet their stringent requirements, is the only one that’s cheaper and they can never seem to get their customer service issues resolved.

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I’ve been using TradeKing for a while now and one of the many things that separates them from their competition (E*Trade, Zecco, etc.) is the wealth of information they offer you, especially with options education. TradeKing has a free ebook, they call them “intelligence reports,” about taxes and the stock market. The Tax & Trading Intelligence Report is free and it’s a seven page document that discusses a variety of stock investing topics from retirement accounts to wash sales.

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