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Your Options Handbook: The Practical Reference and Strategy Guide to Trading Options by Jared A. Levy

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Chapter 4

Options Basics

Techniques and Fundamentals to Master Before Applying Any Options Strategy

Learning about options is like learning how to use tools—and everyone applies tools in different ways. For example, if somebody teaches you how to use a saw, your first question becomes, “What can I do with this saw?”

Depending on how well you’ve learned your lesson, either you can make a beautiful piece of furniture—or you can cut off your hand.

Your Goal Is Not to Cut Off Your Hand.

—Sheldon Natenberg, Options Volatility Trading Strategies

Now that you have gotten to the point where you have an opinion of the economy, the market, and you have found a stock to trade, you have a decision to make. Before you go and fire off an option strategy, you need to know the basics and mechanics of the options markets. This chapter explores both of those.

I sometimes look at non-options traders as absolutely foolish. Of course, not all of them are, but if I told you that you could make a 30% return on your risk and that the stock you wanted to invest in could go up, down, or sideways, wouldn’t you want to trade options?

Of course, there are risks and tradeoffs, but you will learn that when used properly, options (derivatives) trump stock any day of the week. This chapter elucidates the rationale behind that claim.

Trader Tip

Options traders do not view the markets as binary (long and short). An options trader determines not only his or her specific level of bullishness or bearishness (which ...

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