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This chapter is from the book

How Options Work

Options can be thought of as the Swiss Army knife of trading. The combinations and maneuvers available in options trading strategies seem endless. By comparison, stock trading is a simple directional trade. The decision to buy or sell a stock is usually done through fundamental analysis or technical charting techniques. Options traders look at these tools and so much more.

This section is not meant to be an introduction to options, but rather an introduction to options trading. Most options books focus a great deal on comparing completely different options strategies and on what happens at the end of an options trade. A skilled options trader, however, might be in and out of the trade several times before expiration.

In this book the focus is more on practical trading strategies and less on theory. It's not what you know, it's "how" you know it. Your significant paradigm shift is to think like traders and not like investors.

Summarizing some of the basics of options trading is a good starting point for the following review. This review is not meant to be comprehensive but, rather, to serve as an approach that shows you what you need to know in order to get going. Even if you already have some ideas about how options work, the following discussion might still give you food for thought.

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