Options Trading 101: From Theory to Application Review
If your interested in trading options the best advice I can offer you is don’t waste your time (or your money) with misinformation. No matter what the product or service, conduct your own analysis prior to buying or spending time studying. In order to too do this efficiently, you’ll have to learn to skim through various materials and identify credible information from useless hype. And I can guarantee you’ll see plenty of the later in this business. If you ever have questions or want me to take a look at something just reach me via the contact page and I’ll do my best to assist.
Trading options is far and away more complicated than simply trading stock. In fact, it’s been said that some 90% of traders wash out within the first year. But WHY?
Well… I couldn’t know with 100% certainty but I believe its because traders are anxious to get started making money and they forget to build their foundation of knowledge before they start trading live. They forget about the fundamentals and dive into 2 foot of water head first! Its by this logic we could walk out today, properly assess a river, and build a bridge by next Tuesday. Its just not happening! So why attempt to successfully trade options without first learning the most basic principles.
I’ve provided an excellent fundamental course with the most important information free for review here but in his book Options trading 101: From theory to application Bill Johnson goes well beyond my short course and into much greater detail. Bill does the job of taking the information one step at a time and returns to many of the vital points time and again for absolute clarification.
Here is a brief look at the different sections within Options Trading 101: From Theory to Application;
Introduction to Options
In this chapter Mr. Johnson sets the stage for what will follow, and by follow I don’t just mean the next chapter. The information covered here is apart of every single trade you’ll ever make. Topics such as different assets, strike prices, expiration, and bid/ask spreads are all discussed plainly but fully so everyone will understand. I would strongly encourage anyone interested in trading options to read this chapter as many times as is necessary to solidify comprehension. It is absolutely vital to ever trading a single option contract.
Option Pricing Principles
This chapter is going to be a little more complicated for new traders and I may suggest skipping over it until you’ve completed the rest of the book. In it, Bill discusses several pricing principles that even experienced options traders fumble with. Understanding the information covered here is worth its weight in gold for the aspiring trader. The chapter aims to teach the fundamental components of time value vs. intrinsic value, put-call parity, as well as the black-scholes formula, among others, and they all need to be understood before ever placing a live trade.
Profit and Loss Diagrams
This is the fun part! You’ll learn what each position looks like in chart form and you’ll begin to develop your ability to think about complex options strategies graphically. *Secret* Once you can visualize each different strategy in your mind, without the need to have it directly in front of you, then your ready to trade options in a live market. In any case, this is the section you’ll start day dreaming about endless profits and all the profitable trades you’ll soon be making.
The chapter covering volatility should be of particular interest to enthusiastic young traders. In fact, volatility is so important to successful options trading that this is arguably the most important section of the book. While this isn’t the foremost authority over volatility it is the primer that you’ll need to prepare for Sheldon Natenberg’s book, Option Pricing and Volatility, which I certainly recommend or other works covering the subject.
At this point, the remainder of the book dives into different options strategies and the respective strengths and weaknesses of each. I can assure you now that each strategy has a weakness and its your job to understand when a particular strategy is most appropriate. For a much better view of the many…many…many… different options strategies you’ll be better served to read Lawrence McMillan’s, Options as a Strategic Investment, but Options 101 offers a competent and compelling case over each that are discussed.
To wrap up, I hope this brief review has helped you in some way or another to better understand the Options Trading 101: From Theory to Application book. I really do believe it is a great resource for new traders but If you already understand the basics I wouldn’t waste the time or energy reading, it would be a futile exercise. Likewise, if you are more advanced, I actually encourage you to check out Lawrence McMillan’s book but that discussion can be sidelined for another day.
Happy trading to all,
Jeff the “Option Boxer”