Introduction

If you’ve never seen options before and don’t remember the last time you took a math class, this is the book for you. Math is hard, but trading with options doesn’t have to be. Options allow you to change the risk-reward characteristics of trades, but they cost money and have a time limit (they expire). This books is for anyone who wants to learn how to think through options trades. I start by introducing options and the tools you need to understand them - payoff diagrams and the option greeks. The 1st half of the book teaches you how to think about options, and the 2nd half show you how to think through constructing and adjusting options trade.

My Trading Life

I started learning how to invest when I was around 20. I lost over $10,000 in a few years because I made lots of bad investing decisions. I’d find an investment I liked, watch it go up, and sell it too early. Or I’d watch it go down, hold it for too long, and wait a couple of months for it to bounce back. It usually didn’t, so I’d sell and take big losses. I was picking twice as many winners as losers, but still losing money. It took me a while to realize I was the problem. When I had gains, I was so afraid of losing them I’d sell too quickly and only make a little bit. And when I had losses, I didn’t want to take them so I’d hold on too long and take big losses. After a few big losses, I had lost almost all the money I started with.

I didn’t like losing money, and I started looking for the holy grail – a surefire way to make money. I wanted to know the secret the pros were using, how they made their money. I started by looking at people who made money when the US housing market burst. If those guys got that “right”, they must be brilliant traders. The more I looked into it, though, the more I realized that they had gotten that call about as wrong as I got my trades. Lots of them made the trade early and had to wait a long time before it started working. They had to carry losses while the housing market kept going up, until it finally crashed.

That’s when I realized that making “picks” isn’t a great ways to make money. No matter how much research I put into a trade, I’d have to wait a long time for a good chunk of my trades to start working. That’s not a good way to make money, so I started looking for new ways. That led to me learning about options. Since I’m a self-taught trader, I know how many books on trading the stock market are out there. I’ve read a ton of them over the last few years. Books where people tell you how they got rich, how they lost their fortune, technical ones that get very mathematical, and everything in between.

For options, The Options Playbook is a fantastic resource. It’s a rolodex of every option strategy you could ever use. There are online courses and subscription services too, where you can learn about options and follow someone as they make (and adjust) options trades. I subscribe to Big Picture Trading, which is also fantastic. I followed along more frequently when I first started learning about options, and only check it periodically now. There’s no end to the resources out there, and when it comes to trading there’s always something new to learn.

Lessons Learned

If all you need is to learn technical jargon and other people’s strategies, there would be a lot more successful traders out there. There’s a missing ingredient, and that’s how to build a trading system that works for you. The idea is simple: the secret to becoming a successful trader is finding a trading system that fits your personality.

Trades have personalities, too. They behave in different ways. Some are “safe”, some are “risky”, and they all have their own quirks. Most importantly, they react differently to changing market conditions. The trades you make also have to fit your personality. I think a lot of the resources overlook that and just give you information. If you haven’t traded options before and you’re not sure how to put together all that information, the 2nd half of this book goes through how different traders might construct options trades that suit their personality. But before we break down their trades, we need some tools. The 1st one is payoff diagrams, which let us draw out the profit/loss of any options strategy. They’ll be our main tool for understanding how options strategies. The 2nd one is the option greeks, which are a key component of option pricing and are so powerful they can change the way you think about markets. Together, these two tools will help you understand how to construct trades that have risk-reward setups that work with your investing style.