Chapter 1

Are Options for You?

The answer to this question is a personal one. These are some questions to help guide you. There are several benefits associated with trading options. Are you interested in…

• … a more tactical approach to reaching your financial goals?
• … managing the downside risk of the stocks you own?
• … potentially earning more yield on your cash or stocks than you are currently getting in bonds or dividends?

There are also drawbacks to trading options. You need to be comfortable with…

• … possibly needing to be more hands-on to manage trades?
  • With stocks, ETFs, and mutual funds, you can buy, hold, and review performance every few weeks or months. With options, you will need to track performance far more regularly.
• … larger swings in the P&L?
  • For example, in a given week, a stock may go up or down +/-2% while an option could go up 50%+ in the same time period as well as lose 100% of its value.

At this point, you don’t need to be able to ‘say yes’ to each of these answers; if you are OK with at least one benefit and one drawback, that is a good start. Without knowing the ins and outs of options trading, you won’t be able to make the decision of whether or not options trading is for you. That is what this course is for. 

With that said, let’s get started.

If you are reading this, odds are that you have heard about options and probably have some idea of how popular options trading has become over the last several years. There are so many people trading options that the amount of options trading activity on the Nifty 50 is 10x+ that of options on the S&P 500 in the US. Our goals for you with this learning content is to make you a more successful options trader. Whether you are just starting out or have been trading for many years, we hope there is value for everyone in this content.

Over the years, we’ve read and reviewed a number of courses on options trading. Commonly, these courses take one of the two approaches: trader-centric or academic-centric. The trader-centric approach quickly provides the bare minimum necessary to begin trading. While this can be good, this will leave the reader with a false sense of confidence. There can also be confusion over the large quantities of jargon that is quickly introduced in order to get the reader up-to-speed. The academic-centric approach starts by explaining how options are constructed theoretically which helps in understanding how options are priced and traded practically. While it is nice to know concepts like replicating portfolios, binary trees, and put-call parity, we believe these are better served by being introduced later on.

This course is structured in a way so that you don’t feel overwhelmed upfront and at the same time, feel like you are making great progress on your options trading journey. This is how we have divided the major sections:

• Basics of Options: This is the overview of initial concepts like ‘Going Long’ and ‘What are Call Options’.
• Options Terminology: This is where we will introduce option-specific jargon like Strike Prices and Moneyness.
• Options Pricing: This is where we dive into the mechanics of options including pricing and payoffs diagrams.
• Option Strategies: In this section, we explore various strategies along with examples and trade-offs.
• Option Greeks: This advanced discussion provides insights into using option-specific data to improve your odds of trading success.

Our intent is to structure this course such that it is practical, pragmatic, and approachable. You are here because you want to learn how to be an options trader, so practicality is at the forefront of our objective in developing this course. 

We also aren’t in the business of ‘selling’ the idea that you should start trading options. We want to provide you with facts that are necessary to understand what options are, how to trade them, and how best to win with them. We will give you objective guidance using real, historical data where available. Lastly, we aim to make this course approachable. 

Options can be complicated but our belief is that you don’t need a PhD to trade them; however, you do need to spend a bit of time learning their nuances.