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THE SECRET TO PROFITING FROM OPTIONS:
THINK LIKE A PROFESSIONAL OPTION TRADER, NOT A STOCK TRADER!
Want to win in options? You must think like a professional option trader. Step #1: Get rid of the habits you learned in stock trading: they’re killing you! Step #2: Understand the real dynamics of options markets: they are radically, fundamentally different.
Example: When stock traders look at price, they see information. Option traders see probability, time, and volatility. Example: Stock trading is about having an information advantage. Option trading can be about exploiting a lack of information. Example: Stocks either go up or they don’t. Option trades can be structured for a 90% probability of success.
With dynamics like these, option trading is like nothing else. Through practical, simple examples, Michael Benklifa will help you understand what’s really going on here…so you can consistently build trades that earn profits and control risk!
Introduction: Why Traders Fail 1
Is Failure a Flaw? 2
Blaming Emotions 2
Blaming Systems 3
Successful Traders Versus Successful Trading 5
Trading for a Living 6
Trade for the Right Reasons 6
The Ability to Duplicate a Strategy 7
Correlation Versus Causation 7
Don’t Trade to Make Money 9
What Kind of Trader Are You? 10
A Single Difference Goes a Long Way 11
A Limited Worldview 13
Chapter 1 Understanding Options 15
What Is a Stock? 15
What Is an Option? 18
The Bet You Wouldn’t Make 18
The Options Trader’s Toolbox 22
Chapter 2 What Is Price? 33
How a Stock Trader Looks at Stock Price 33
How Options Traders Look at Stock Price 37
How an Options Trader Looks at an Option’s Price 48
Chapter 3 Pure Options Trading: Building Your Own Trade 67
Basic Greek Concepts 69
Build 1: Making a Directionless Trade 74
Build 2: Reducing Your Risk 78
Build 3: Augmented Returns 88
Bending the Curve 95
The Options Trader’s Toolbox: Synthetic Straddles 96
Evolving a Trade 98
In-, At-, and Out-of-the-Money Trades 98
Chapter 4 Situational Trading 99
Known Knowns 100
Analyzing Situations 105
Building a Directional Trade 106
Known Unknowns 126
Unknown Unknowns 137
Chapter 5 Risk Management 157
Responsibility in Trading 157
Strategy Is Risk Management 159
How a Stock Trader Measures Risk 160
Defined Risk for Options Traders 163
Layering and Unlayering Trades 164
Trades Cannot Be Fixed, Just Replaced 165
Portfolio Risk 166
Concluding Remarks 168
Appendix: Quantum Physics and Trading—The Price Uncertainty Principle 171