Option Trading: A Basic Introduction

Introduction

The three videos that can be accessed in the links below are a short introduction to the low-risk options trading strategies of secured puts and covered calls. I made the videos primarily to give interested friends and family an insight into the sort of options trading I have been practicing for a few years now. Although the videos are on YouTube, I have not made them searchable for everyone because I believe that there are better instructional videos out there already. Of course, there are also some that are much worse! If you decide to try this sort of option trading for yourself, you should seek out some of the other (good) video introductions in addition to mine. These strategies are low-risk but not no risk. I also like to describe this approach as a get rich slow scheme. You might see stories (particularly online) of option trades that make a fast fortune; that will not happen with this slow-and-steady approach. Of course, using risky option plays, for every fast fortune there are 90 lose everything investors.

If you are wondering if the videos are relevant for you, be aware that this presentation assumes that you are familiar with managing a self-directed brokerage account where you have experience buying and selling stocks. If you have not done self-directed trading in a regular, IRA, or Roth IRA brokerage account, then these videos might be interesting in a general sense, but they are not something you will be able to implement with your current investments. Stock trading exeprience and a brokerage account are necessary starting points to trading options. Even if you have a brokerage account you will likely have to request permission to trade options. With no previous options experience, most brokerages will grant you Level 1 option permission which will allow you trade secured puts and covered calls. The reason they are willing to grant that low-level introductory access is because these strategies have essentially the same amount of risk as simply trading stocks alone.

How did I get started in options? To begin I have been doing self-directed investing for over 30 years. I started an investment account when I got my first paying job as a post-doctoral researcher at Argonne National Labs. I started with mutual fund investing, but moved on to individual stocks as the amount of money in my portfolio grew. In a sense, I started investing much earlier than that. My father was an avid investor and my interest in the subject was strongly influenced by him. When I was about 12 years old I asked about his investments. He told me to pick a stock (back then from the list of stocks in the newspaper!) and we bought 100 shares of a company called Beach Oil for one dollar a share (we were living in Australia at the time). Over the next few months we watched Beach oil drop from a dollar to forty cents. At that point we cut our losses and sold. That was my first important lesson in investing: you can lose money!

I was introduced to options by a magazine called thinkMoney that TD Ameritrade used to send to their self-directed brokerage customers. The magazine was written in a pretty wild style; it described both the basics of options, but also many of the more complicated trades with wacky names like Iron Butterfly or Iron Condor. Reading about options made me determined to learn more. i did a lot of internet reading and YouTube watching, and quite a bit of back of the envelope calculating before I ventured into my first option trades. I went slow, seeing how individual trades worked out. There are lessons to be learned not just about options, but also about the tax consequences if you are trading in a regular (i.e. not tax deferred or tax exempt) account. If you decide to try options, adopt my slow and careful approach. In retirement I have more time to watch the market and make timely decisions. Now, with a few years of experience, I do about 300 option trades a year. It is definitely profitable, otherwise I wouldn't do it. The options trades generate extra income over and above what my stock holdings would do on their own. The whole enterprise is also a bit of a hobby that makes me get up and be connected to the world every day. Some people play video games, watch sports, play golf, or gamble online: I trade options.