Understanding Options

Who Should Read This Book

If you are thinking of trading stock options or you are already trading but losing money, this could be the most useful book you ever read. I have taken the classes, read the books, talked to the pros, and made the trades so I can teach you what I learned. Like my other books, I try to explain options as if you were sitting across from me at the kitchen table. My goal is to save you time and money while educating and entertaining you.

An options book that is entertaining? I know it sounds ridiculous, especially if you slogged through the dozens of other options books that are supposedly for beginners. Most of the options books I have read sound as though they were written for lawyers or mathematicians. They make options seem a lot more confusing than they actually are. Perhaps it's because options contracts are legal contracts that include specialized terms. As much as possible, I will leave most of the lawyerly talk at the office.

I have one friend who is afraid to take risks and another one who is a speculator. When I told my timid friend he should consider trading options, he immediately snapped, "Are you crazy? That's way too complicated for me. I don't want to lose all my money." He was an experienced stock market investor who liked to buy and hold stocks and mutual funds. He believes that options are a get-rich-quick scheme that operates like a casino. He was convinced that options were not friendly to risk-averse investors.

My speculator friend, a successful dentist, is addicted to the Vegas-style action of the stock market. When the stock market wasn't exciting enough, he and his wife enrolled in an options seminar, plunking down $4,000 for the two-day course (not including the $2,000 software that supposedly chose winning options). The instructor pressed all the right buttons, and by the end of the class my friend was ready to plunge into options using sexy strategies like naked puts, bull and bear spreads, and straddles.

He was convinced that he could quickly make a fortune in options through the most sophisticated strategies. He believed that the more complicated the strategy, the more money he'd make. Fortunately, he talked to me first.

I wrote this book for my two friends and thousands more like them. If you think that options are too complicated or dangerous, give me a chance to change your mind. The good news is that there is an options strategy that will meet the needs of both of my friends,from the risk-averse conservative investor to the risk-loving speculator. In addition, if you are reading this book not to make money but for education or entertainment, I believe the book will meet your needs.

If you are thinking of taking an expensive options course, then read this book first. It could save you thousands of dollars. Even if you still decide to take the course, you'll be much better prepared. Also, if you are one of the 10 million employees who receive stock options from your employer, this book could help you to understand the benefits and risks of stock options.

And, finally, if you are concerned this book is too basic, there are enough advanced strategies in later chapters to whet your appetite, including a dynamic interview with an options guru. I describe all of the advanced strategies with my usual reader-friendly style.

What's So Great about Options?

What if I told you that you could use options to make money every month or every quarter? And what if I told you that you can use options as insurance, for example, to protect your stock portfolio? And if, on occasion, you wanted to speculate, you could leverage your money to double or triple your profits. It will cost you a lot less than if you bought stocks. And finally, if you like to short stocks, it is safer to use options than to use the stock market.

Speaking of safety, did you know the single best reason for choosing options is that you know in advance how much you can lose? You are in control of how much risk you are willing to take. If used properly, options can be used by all investors or traders to generate income, for insurance, and to speculate. By the time you finish this book, you should have a good idea what options can do for you and whether you want to participate.

For example, one of my friends who just started trading called to tell me he experimented with a sophisticated options strategy called straddle (explained later in this book). After investing $2,000, he sold the option for a $25,000 profit the next day. Perhaps it was beginner's luck, but it goes to show you can hit a home run on occasion. Another friend has been using a conservative options strategy called selling covered calls to receive monthly income.

One reason you'll like options is that you can make money no matter what the market conditions. That doesn't include all the advanced strategies, which will be discussed in detail throughout the book. Options are a powerful tool that, if used properly, can be used in conjunction with the stock market to enhance your portfolio.

At the very least, it's smart to learn everything you can about this fascinating and flexible financial instrument. When you hear that options are flexible, it simply means that you can trade them under any market condition and that the strategies can be as simple or as complicated as you want to make them. Can you think of any other financial instrument besides stocks that meets the needs of investors no matter what their income level or financial goals?

How the Book Is Organized

This book is divided into six parts. Part One, "What You Need to Know First," includes a thorough overview of options. Beginning with Part Two, the book is organized the same way as you would trade, from introductory Level 1 strategies to advanced Level 4 strategies. After you gain more experience, you may want to take a closer look at the advanced strategies. In addition, you'll enjoy the must-read interview with Sheldon Natenberg, best-selling author and a recognized options expert.

And finally, in the last section, a list of books, classes, software, and other resources are included for those who want to continue studying options. (If you have questions while reading this book, I include a toll-free phone number in Chapter 18 that will give you immediate answers.)

Some of you might wonder how it's possible to write such a short book when most options books are well over 500 pages. First, most of those books are aimed at the pros, not retail traders. Second, other authors devote hundreds of pages to explaining how options are constructed using complicated formulas. Although I do introduce pricing formulas, my theory is you don't have to learn how an engine works to drive a car.

Although analyzing options formulas might be interesting to mathematicians, I'd prefer to keep my eye on the bottom line, which is to teach you what you need to know to successfully trade options. Trading options is not as hard as many people think, but it's also not as easy as some want you to believe.

How to Contact Me

It is estimated that only 5 percent of the population actually understands how options work. It's easy to understand why. After all, it takes skill, knowledge, experience, and perseverance to be a successful options trader. By the time you finish the book, perhaps you will be ready to join this small group of knowledgeable traders.

Once again, if you have questions about my books or notice any errors, feel free to e-mail me at msincere@gmail.com

I look forward to hearing from you.

Michael Sincere