Options Trading: Beginner’s Guide to Winning Up to 98% of Your Trades by David Jaffee

Options Trading: Beginner’s Guide to Winning Up to 98% of Your Trades by David Jaffee

CHAPTER 1- What are Options?
Options are derivatives.
Options may seem hard to understand, but it'll become a lot easier to
understand them (and how to profit from them) after reading this book.
Investors usually like to diversify their investments with different financial
products such as bonds, stocks, mutual funds, futures, options, etc.
Personally, I prefer only trading options because by selling options, you're
able to turn yourself into a casino and insurance company by collecting
option premium.
Additionally, options are leveraged products which are more capital
efficient than trading stock outright.
Options represent a contract to sell or buy stock. An option contract gives
buyers the right, rather than the obligation, to sell or buy the underlying
asset at a stated price before the expiration date.
People use options to hedge risk, to generate additional income or as their
primary method of profiting from the market.
An option is also known as a derivative because its value is derived from an
underlying asset.
Here are some basic terms that you'll need to become familiar with when
trading options:
- Strike price (also called the “exercise price”) refers to the
predetermined price at which the holder may decide to sell or buy
when the option can been exercised.
- Option premium is the amount of premium received (or paid) when
buying or selling an option.
- Expiration date is the date when an option becomes invalid and
becomes worthless. Generally, options lose value as their expiration
date gets closer.
- Option price is the current price of the option as quoted in the market
- Theta decay is the daily decay of an options extrinsic value
- Extrinsic value is the time value of the option. An OTM option is
comprised of all extrinsic value
- OTM refers to out-of-the-money, we usually sell OTM options.
I don't want to confuse, or overwhelm you, and we will expand upon
these definitions, and define other terms, later in this book.
Depending upon your experience level, you may, or may not, feel
very comfortable with the terminology.
What I can tell you is that it's extremely important to keep things as
simple as possible.
If you overwhelm yourself with trying to remember every definition,
then you may not focus on the most important task: making good
decisions.
Trading Psychology: The Emotional Toll Of Being A Trader
Before we begin with the actual strategy, let's discuss realistic expectations
of trading.
As much as others may want you to believe that you are going to make
money every day, remember that there is no easy money when trading
options, and you will experience challenging times.
The emotional toll of being a trader can affect you if you are not prepared.
How will you react if you lose 5% of your account size in a week?
This is not common but, when it happens, it can cause massive stress,
anxiety, and even depression.
The big question is: are you able to overcome the greed to make as much
money as possible (and take unnecessary risk) so that you can easily
overcome the 1x – 2x a year when the market acts irrationally and the
actual moves are more than the expected moves?
Remember that the pain of losses far outweighs the happiness from gains.

Options Trading: Beginner’s Guide to Winning Up to 98% of Your Trades by David Jaffee