Introduction

Option trading is a way for savvy investors to leverage assets and control some of the risks associated with playing the market. Pretty much every investor is familiar with the saying, “Buy low and sell high.” But with options, it’s possible to profit whether stocks are going up, down, or sideways. You can use options to cut losses, protect gains, and control large chunks of stock with a relatively small cash outlay.

On the other hand, option strategies can be complicated and risky. Not only might you lose your entire investment, some strategies may expose you to theoretically unlimited losses.

So before you trade options, it’s important to think about the effects that variables like implied volatility and time decay will have on your strategy. This Playbook will help you answer those tough questions. No need to ponder, just turn to the strategy.

We’re not going to derive the Black-Scholes option pricing model here. As a matter of fact, this is one of the only times we even mention the Black-Scholes model. It’s nice to know that sort of thing, but the goal here is to provide the essential knowledge needed to trade a specific strategy, not to completely bore the pants off of you.

Throughout this Playbook, you’ll also find “Options Guy’s Tips,” which clarify essential concepts or give you extra advice on how to run a particular strategy. As an indicator of these tips’ importance, there's a little picture of my head next to them like the one you see on the right. So be sure to pay extra attention whenever you see my melon.

I certainly hope you enjoy reading The Options Playbook.

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Introduction

Option trading is a way for savvy investors to leverage assets and control some of the risksassociated with playing the market...

Option Basic

Here are a few things you absolutely need to understand before this Playbook will make as muchsense to you as we hope it will...

Key Options Terms

Don’t worry if some of these meanings aren’t crystal clear at first. That’s normal. Just keep forgingahead, and everything will become more apparent over time...

A Brief History of Options

There are plenty of good option traders who don’t knowanything about the following historical facts. But we’veincluded this section for those inquisitive...

What is Volatility?

Some traders mistakenly believe that volatility is based on a directional trendin the stock price. Not so. By definition, volatility is simply the amount thestock price fluctuates...

Meet the Greeks

Before you read the strategies, it’s a good idea to get to know these characters because they’ll affectthe price of every option you trade.Keep in mind as you’re getting acquainted...

What is an Index Option?

Like stock options, index option prices rise or fall based on several factors, like the value of theunderlying security, strike price, volatility, time until expiration...

Cashing Out Your Options

Some beginning option traders think that any time youbuy or sell options, you eventually have to trade theunderlying stock. That’s simply not true...

Keeping Tabs on Open Interest

As opposed to stocks, which have a fixed number of shares outstanding, there’s no minimum ormaximum number of option contracts that can exist for any given underlying stock...

The Players in the Game

Many option traders don’t understand who might be buying or selling the options on the other end oftheir transaction. Fortunately, after reading this, you won’t be one of them.