Trade Options Like a Pro - Your Ultimate Beginner's Guide to Options Trading - Volume 1: The Holy Grail Series, #1

By S. Fanous

"Your Ultimate Beginner's Guide to Options Trading" Volume 1 is part of a complete Full Options Course in 3 volumes. You don't need to spend thousands of dollars to trade Options like a pro.
This is the Only Options Course You Will Ever Need"
The full course is designed to take you from the basics to advanced strategies in options trading. Whether you're a beginner or an experienced trader, this book offers a structured and detailed approach to mastering options.

Chapter Highlights

Chapter 1: Introduction Explore the rich history and evolution of options trading, from ancient beginnings to the modern financial markets. Understand the common pitfalls traders face and best practices to avoid them.

Chapter 2: The Basics of Options Learn what options are through real-life examples and understand why they are a valuable trading tool. This chapter covers basic terminologies and explains how options work and the associated risks.

Chapter 3: Risk Management Delve into the key concepts and techniques of risk management. Develop a robust risk management plan and learn practical steps to implement it, with case studies and examples to guide you.

Chapter 4: Trading Psychology Understand the psychological challenges in trading and develop strategies to build emotional discipline and a resilient mindset. This chapter provides practical steps to enhance your trading psychology and avoid common pitfalls.

Chapter 5: Introduction to Technical Analysis Gain insights into the basic principles of technical analysis, including types of charts, trends, support and resistance, volume analysis, moving averages, and basic chart patterns.

Chapter 6: Setting Up for Success Learn how to choose a broker, understand the options market, and navigate exchanges and platforms. This chapter also covers regulatory environments, margin requirements, and settlement procedures.

Chapter 7: Understanding Options Pricing Discover how options are priced by exploring intrinsic value, time value, volatility, interest rates, dividends, and the Black-Scholes model. Understand the role of market makers in the options market.

Chapter 8: Basic Options Strategies Master fundamental options strategies such as buying calls, buying puts, selling covered calls, and selling cash-secured puts. Understand the characteristics and practical applications of each strategy.

Chapter 9: The Greeks Get an in-depth explanation of the options Greeks (Delta, Gamma, Theta, Vega, and Rho) and their practical implications in trading.

Chapter 10: Implied Volatility Understand implied volatility, its calculation, and its impact on options pricing. Learn to identify overvalued and undervalued options and use options pricing calculators effectively.

Chapter 11: The Expected (Implied) Move Learn how to calculate the expected move of an asset and understand its implications. This chapter explains standard deviations and provides practical examples.

Chapter 12: Connect with the Author Find out how to connect with the author for feedback and questions, fostering a community of continuous learning and improvement.

Chapter 13: Frequently Asked Questions (FAQs) Address common questions related to general options trading, pricing and valuation, trading strategies, risk management, technical analysis, execution, and settlement.

Appendix: List of Common Terms Related to Options Trading A comprehensive glossary of key terms in options trading, serving as a handy reference for readers.

This book aims to equip readers with the knowledge and tools necessary to navigate the options market confidently and successfully and setting you up for the next volume.

• Language: English
• Publisher: S. Fanous
• Release date: Jun 23, 2024
• ISBN: 9798227646217

S. Fanous

Sherif is a seasoned mechanical engineer and an experienced trader with a rich history in the financial markets. Since beginning his trading journey in 1998, and executed his first options trade in 2001, marking the start of a deep and enduring interest in this complex financial instrument. His dedication to understanding market dynamics is further demonstrated by his pursuit of the CFA designation up to Level 2 of the program. As an accomplished author, Sherif has penned insightful books on trading, sharing his wealth of knowledge and practical strategies. He actively guide traders in managing their portfolios and selecting stocks, offering valuable advice and mentorship. In addition, Sherif produces a weekly report on gold , providing in-depth analysis and market insights to help traders make informed decisions. With a solid foundation in both engineering and finance, Sherif combines analytical rigor with strategic acumen to navigate the markets effectively. This unique blend of skills and experiences has equipped him with the insights and expertise needed to educate and guide others in the world of trading and investments.

Book preview

Chapter 1: Introduction

History and Evolution of Options Trading

Ancient Beginnings

Early Examples in Ancient Greece: The concept of options dates back to ancient times. One of the earliest recorded instances involves the Greek philosopher Thales, who used options to secure the right to use olive presses. Anticipating a bumper olive harvest, he paid a small fee to reserve the presses, which he later rented out at a profit when the harvest proved plentiful.

Middle Ages and Forward Contracts: During the Middle Ages, the use of forward contracts and other primitive forms of options became more common in Europe, particularly in the trading of agricultural products.

17th Century: The Dutch Tulip Mania

Tulip Mania: One of the most famous early examples of speculative trading occurred during the Dutch Tulip Mania of the 1630s. Tulip bulb traders used option-like contracts to buy or sell bulbs at predetermined prices, contributing to an infamous speculative bubble.

Formation of Derivative Markets: This period saw the emergence of more formalized derivative markets. Although the Tulip Mania ended in financial disaster, it highlighted the potential and risks associated with speculative trading instruments like options.

18th and 19th Centuries: The Birth of Modern Options

Options in the UK: By the late 18th century, options trading had started to develop in the UK, particularly in London. The London Stock Exchange became a hub for trading options on shares of public companies.

American Options Trading: In the United States, options trading began to gain traction in the 19th century. The establishment of the Chicago Board of Trade (CBOT) in 1848 played a crucial role in formalizing commodity and option trading, initially focusing on agricultural products.

Early 20th Century: Regulation and Standardization

Lack of Standardization: Early options trading was often characterized by a lack of standardization and regulation. This led to various problems, including manipulation and a lack of transparency.

Calls and Puts in the 1920s: The 1920s saw the formal introduction of standardized call and put options in the US. Despite this progress, options trading remained relatively obscure and was often viewed with skepticism by the broader financial community.

1970s: The Modern Options Market

The Chicago Board Options Exchange (CBOE): A pivotal moment in the history of options trading occurred with the establishment of the CBOE in 1973. This marked the beginning of the modern era of options trading. The CBOE introduced standardized, listed options on equities, which provided greater transparency and liquidity.

The Black-Scholes Model: Also in 1973, Fischer Black and Myron Scholes published their ground-breaking paper on option pricing, introducing the Black-Scholes model. This mathematical model provided a method to price options more accurately, revolutionizing the options market and contributing to its growth.

1980s and 1990s: Expansion and Technological Advances

Increased Popularity: The 1980s and 1990s saw a significant increase in the popularity of options trading. The introduction of index options, options on futures, and other innovative products expanded the market.

Technological Advances: The advent of computer technology and electronic trading platforms in the 1980s and 1990s greatly enhanced the efficiency of options trading. Automated trading systems and online brokerages made it easier for individual investors to participate in the options market.

Regulatory Developments: During this period, regulatory bodies such as the Securities and Exchange Commission (SEC) in the US implemented measures to protect investors and ensure the integrity of the options market. These included margin requirements, position limits, and enhanced disclosure standards.

21st Century: Globalization and Innovation

Global Expansion: The options market has continued to expand globally, with exchanges in Europe, Asia, and other regions offering a wide variety of options products. International participation has increased, making the options market more interconnected.

Exotic Options: The development of exotic options, such as barrier options, Asian options, and binary options, has provided traders with more sophisticated tools to manage risk and implement complex trading strategies.

Algorithmic Trading: The rise of algorithmic and high-frequency trading has transformed the options market. These technologies allow for the rapid execution of trades and sophisticated risk management, contributing to increased liquidity and tighter spreads.

Educational Resources: With the growth of the internet, educational resources on options trading have become widely available. This has helped demystify options and attract a broader range of participants, from retail investors to institutional traders.

Present Day: The Role of Options in Modern Finance

Risk Management and Speculation: Today, options are a crucial tool for risk management and speculative purposes. They are used by a wide range of market participants, including individual investors, hedge funds, and institutional investors.

Innovation Continues: The options market continues to evolve, with ongoing innovation in products, trading strategies, and technologies. The introduction of new asset classes, such as cryptocurrency options, reflects the market's adaptability and growth.

In conclusion, the history and evolution of options trading is a story of innovation, regulation, and increasing sophistication. From ancient Greece to the digital age, options have developed into a vital component of the global financial system, offering unique opportunities and challenges to traders and investors.

Opening Paragraph

Becoming a successful trader grants you financial freedom and independence, allowing you to work without answering to anyone. With a reliable internet connection, you can trade from anywhere in the world.

This is a dream for many, but unfortunately, most people fail. The reasons often include a lack of knowledge, discipline, or simply following the herd without understanding what is truly happening.

To earn a living from trading, you must consistently generate profits, which means the value of your winning trades must surpass that of your losing trades. Understanding how losses occur and avoiding them is essential to achieve this.

My own education in trading came at a high cost; I depleted my account eight times and made every conceivable mistake. Reflecting on my own journey, it's clear that recognizing and avoiding common trading pitfalls is crucial. To fix your mistakes, you must first recognize that you are making them. Can you pinpoint your mistakes?

One thing to remember is that, to the market, you don't really exist. You enter a trade and, the second you click buy, the stock plummets. Was the market waiting for you to enter the trade to take your money? Of course not. Were you just unlucky? Don’t go down that road; it will cost you too much. Simply put, your timing was wrong. Admit it—denial will only lead to more significant losses.

Consider your losses as tuition fees for your trading education. After a losing trade, don't immediately jump back into the market. Leave your desk, do something else, and take a break for an hour, a day, or even a week—whatever you need. Clear your mind so you can return with a fresh perspective. When you come back, review the losing trade to understand what went wrong and what you could have done to avoid it. Remember, don't rush into a new trade immediately after a loss. This patience and reflection will help you grow as a trader and avoid repeating the same mistakes.

What do you do before entering a trade? Do you flip a coin, or do you spend hours on research? Are you fearful, unable to take your eyes off the screen, or are you relaxed and confident?

Ask yourself this crucial question: Why have I entered this trade? What answer will you get?

If you get any of the following answers, then this series is for you:

Everyone is buying, so I thought I should too.

I have a feeling it might go up.

The stock jumped 100% in one week; it must continue.

The price is too low.

My broker told me to buy it.

I read a positive article about the company.

A friend recommended it.

I saw it trending on social media.

I like the company’s products.

The stock has a cool ticker symbol.

I’m trying to recover losses from another trade.

I saw a celebrity or influencer endorsing it.

It has a high dividend yield.

I’m following a hot tip from an online forum.

I want to diversify without understanding the fundamentals.

These responses highlight common pitfalls that this series aims to address, helping you develop a more informed and strategic approach to trading.

Conversely, here are some good reasons why professional traders might initiate a trade:

Strong fundamentals: The company has solid financials, including strong revenue growth, profitability, and a healthy balance sheet.

Positive earnings reports: The company consistently meets or exceeds earnings expectations.

Competitive advantage: The company has a unique market position, strong brand, or proprietary technology that sets it apart from competitors.

Market trends: The stock is in an industry that is experiencing positive growth trends.

Technical indicators: Favorable technical indicators such as moving averages, relative strength index (RSI), and other chart patterns signal a buy.

Valuation metrics: The stock is undervalued based on valuation metrics like the P/E ratio, P/B ratio, or discounted cash flow analysis.

Insider buying: Significant insider buying can indicate confidence from those within the company.

Analyst recommendations: Positive ratings and upgrades from reputable analysts.

Dividend yield: The stock offers a high and sustainable dividend yield.

Macro-economic factors: The stock stands to benefit from broader economic trends or government policies.

Earnings growth potential: The company has strong projected earnings growth.

Institutional interest: Increasing interest from institutional investors.

Industry leadership: The company is a leader in its industry or sector.

Mergers and acquisitions: Potential for the company to be involved in favorable mergers or acquisitions.

Innovative products/services: The company is launching innovative products or services with high market potential.

Management quality: Experienced and reputable management team with a strong track record.

Cash flow: Strong and consistent free cash flow generation.

These reasons reflect a well-rounded and informed approach to stock selection, combining fundamental analysis, technical analysis, and market insights. My goal is to guide you from giving novice answers to making professional, well-informed decisions.

In trading, there's only one friend who can make you rich: yourself.

Conversely, there's only one enemy who could make you broke: again, it's you.

Practical Advice for Traders:

Start Small: Begin with smaller position sizes to build confidence and refine strategies.

Keep Learning: Continuously educate yourself and adapt to market changes.

Track Performance: Maintain a trading journal to analyze trades and improve over time.

Stay Disciplined: Stick to your trading plan and risk management rules without letting emotions drive decisions.

By following these guidelines, a trader can realistically aim for a 1% weekly profit while managing risk effectively.

Understanding the Pitfalls: Why Traders Lose Money

Common Reasons for Losses:

Lack of Knowledge and Preparation:

Explanation: Many traders enter the market without a solid understanding of how it works. They may lack knowledge of basic trading principles, technical analysis, fundamental analysis, and market trends.

Impact: This leads to poor decision-making, mistimed trades, and ultimately losses.

Avoidance Strategy: Invest time in education and continuous learning. Read books, take courses, and always practice with paper trading.

Example: Sarah, a new trader, bought shares of a tech company because she heard it was the next big thing. She didn't research the company’s financial health or understand the impact of a recent interest rate hike. When the stock plummeted, she lost a significant portion of her investment.

Emotional Trading:

Explanation: Emotions such as fear, greed, and hope can cloud judgment and lead to impulsive decisions.

Impact: Emotional trading often results in chasing losses, abandoning trading plans, and making irrational decisions.

Avoidance Strategy: Develop a trading plan and stick to it. Practice mindfulness and stress management techniques to maintain emotional control.

Example: Tom felt euphoric after a series of winning trades and decided to double his position size without adjusting his risk management strategy. When the market turned against him, his losses were magnified, wiping out weeks of profits.

Overtrading:

Explanation: Trading too frequently, often in an attempt to recover losses or out of boredom.

Impact: Increases transaction costs and leads to more opportunities for losses.

Avoidance Strategy: Set clear trading goals and limits. Focus on quality trades over quantity and avoid trading out of impatience or revenge.

Example: Lisa, frustrated by a losing streak, made numerous trades in a single day trying to recover her losses. Her frantic trading led to increased transaction costs and further losses, compounding her initial mistake.

Poor Risk Management:

Explanation: Failing to manage risk properly, such as not using stop-loss orders or risking too much on a single trade.

Impact: A single bad trade can wipe out a significant portion of the account.

Avoidance Strategy: Implement strict risk management techniques, such as setting stop-loss orders, limiting the risk per trade, and diversifying investments.

Example: John invested 50% of his portfolio in one stock without a stop-loss order. When unexpected bad news hit the company, the stock price plummeted, and John’s account suffered a massive loss.

Chasing the Market:

Explanation: Entering trades based on recent market movements without a solid analysis.

Impact: Often results in buying high and selling low, leading to losses.

Avoidance Strategy: Stick to your trading strategy and avoid reacting impulsively to market movements.

Example: Emily bought a stock at its peak because she saw it had been rising rapidly over the past week. Shortly after she bought it, the price corrected, and she ended up with a substantial loss.

Lack of Discipline:

Explanation: Not adhering to a trading plan or strategy.

Impact: Leads to inconsistent trading performance and increased losses.

Avoidance Strategy: Develop a comprehensive trading plan and follow it rigorously. Keep a trading journal to track adherence to the plan.

Example: Mike developed a solid trading plan but often deviated from it, especially when influenced by market rumors. His inconsistent approach led to erratic performance and unnecessary losses.

Ignoring Market Trends:

Explanation: Trading against the overall market trend or ignoring significant trend changes.

Impact: Leads to losses as the trader fights the prevailing market direction.

Avoidance Strategy: Use technical analysis tools to identify and follow market trends. Avoid contrarian trades unless there is strong evidence to support them.

Example: Karen kept buying stocks in a sector that was clearly in a downtrend, believing they were undervalued. Her contrarian approach led to continuous losses as the sector kept declining.

Failure to Adapt:

Explanation: Sticking to a single strategy or approach regardless of changing market conditions.

Impact: What works in one market environment may not work in another, leading to losses.

Avoidance Strategy: Continuously evaluate and adjust your trading strategies based on current market conditions. Stay flexible and open to new approaches.

Example: Robert’s strategy worked well in a bull market, but he failed to adapt when the market turned bearish. His continued use of the same strategy in a declining market led to significant losses.

Poor Execution:

Explanation: Slippage, entering trades at the wrong time, or failing to execute trades efficiently.

Impact: Results in suboptimal entry and exit points, leading to losses.

Avoidance Strategy: Use limit orders to control entry and exit points. Ensure you have a reliable and fast trading platform. Review the order slip three times before clicking send. Three times, make it a habit.

Example: Alex decided to enter a trade during a high volatility period without using limit orders. The slippage resulted in a much worse entry price than expected, leading to an immediate loss.

Understanding these pitfalls is only half the battle; let's now explore best practices to prevent them.

Best Practices to Avoid These Pitfalls:

Education and Continuous Learning:

Regularly update your knowledge through books, courses, webinars, and trading forums.

Practice with paper trading to build confidence and refine strategies without risking real money.

Developing a Trading Plan:

Create a detailed trading plan outlining your strategies,