Home > Articles > Business & Management > Finance & Investing

Introduction to Options Made Easy: Your Guide to Profitable Trading

Options are becoming more and more popular each day. Far from being confined solely to the institutions and professional money managers, options trading is now a worldwide phenomenon for "retail" traders of all walks of life. The concept of options is still, however, treated with fear and trepidation in some quarters. This chapter will help you allay some of that fear by introducing you to basic investment terms and strategies.
This chapter is from the book

Why is it that options are so misconceived as a minefield of danger and risk? How can we make sense of this and look at options as tools to limit our risks, maximize our returns, and SEE WHAT WE’RE DOING at the same time? This is the essence of OptionEasy and this book—how to make seemingly complex things simple.

Options are becoming more and more popular each day. Far from being confined solely to the institutions and professional money managers, options trading is now a worldwide phenomenon for "retail" traders of all walks of life. The concept of options is still, however, treated with fear and trepidation in some quarters. When I first embarked upon serious trading, one of my friends warned me profusely about what I was getting into. I calmly pointed out that I wasn’t a gambler and that I would be perfectly safe and successful. And so can you.

Criteria for Successful Investing

  • patience
  • perseverance
  • knowledge
  • honesty
  • pre-planning
  • discipline


Learning that you can make a lot of money on the markets is one of the most exciting moments you can experience in your professional life. A whole new world of possibilities opens up before you as you begin to imagine your dream house, car, boat, and vacations with your family. I’ve seen people get so excited after just one little seminar that they actually started trading right there and then. Not smart! Give yourself some time to get used to the idea. And never start trading on an emotional wave of any kind whatsoever. You need to be switched on, alert and calm. Many workshops give you the emotional high but without the substance of real experience (and sometimes many other things, like knowledge!).

Think about it this way. Would you consider yourself able to do brain surgery after just one conference? Well, in a different context the same applies to trading, and even more so for options trading (although the same principles apply). Give yourself time to learn. By reading this book, you are doing just that, giving yourself a learning opportunity. By now, you’re probably used to trading stocks or futures in the markets. So now is the next step. And just as you had to get comfortable with trading stocks or futures at first, you also now have to get comfortable with trading options.

I’ve seen people get so excited after just one little seminar that they actually started trading there and then. Not smart!

Furthermore, when you are comfortable enough to trade, you need to have an abundance of patience to do the trading itself. We’ve all had the experience of jumping into an investment too early even when we weren’t quite convinced it was the right thing to do. Be patient, take a deep breath if you have to, and stick to your plan of action.

Finally, patience also involves selecting a trading strategy where time works in your favor and where your downside is covered. Be patient in your attitude to acquiring wealth. The more patient you are in this way, the better off you will be. This doesn’t mean sitting back and doing nothing—that’s apathy, not patience! Give yourself time to learn, gain experience and then start to apply consistently time and time again so that you begin a process of making money and building wealth.

Consistent with the art of patience is your embracing the concept of compounding. If you can make just 1% per week, this would mean more than 67% in just one year, a record of which any fund manager would be envious. The following table illustrates the power of compounding if you start with just $10,000 in your account:

Weekly Return %

Monthly Return %

1 year

2 years

3 years

3-year return %































This table is simply here to convince you about the need to be patient. Allow your returns to accumulate, and let the magic of compounding do its work for you. We’re not suggesting these as consistent, realistic growth targets for you, but it helps to see where you’d be in three years even if you were succeeding with modest returns.


Keep going for it! If there’s one thing I’ve learned in life, it’s that if you believe in something you have to keep at it until you reach your goal. And once you’ve reached your goal, then set another target.

Having embarked on the mission of becoming a successful trader (whether full-time or part-time), you must stick to it. Anyone can do it. Even those who don’t think they can. Babies don’t give up trying to walk or talk after a few unsuccessful attempts, do they? Well, follow their example and now you’re here, stick to it and prepare yourself to be rewarded richly from this process of learning.

To be practical, give yourself attainable targets to reach in a realistic time frame. So by next week you’ll be fully familiar with the four main options risk profiles. You may be able to do it tonight. Keep on setting the attainable targets (do make them a slight challenge, though!) and in this way you’ll be able to keep up the momentum of learning and gaining experience. You’ll also start to build up your confidence as you go along, reassuring yourself of your ability to understand anything you put your mind to. This book will help you in building your confidence because it’s a practical book and it’s easy to follow and understand. So keep going and enjoy the process of accumulating. . ..


Having established the need for patience for both acquiring the knowledge and for trading itself, let’s remember that knowledge is attainable now with such ease and speed that it is eminently achievable in a reasonably quick time. Tools exist now to simulate the trading experience, and there are myriad publications and web sites designed to help you build up your knowledge database.

The best knowledge you will ever get is experience. It’s all very well to say, "trade mechanically," but very few people do. Why? Because we’re human beings and have emotions and feelings. It’s true to say that they are best left away from the trading environment, but we have to learn how to do that first. It’s no good just saying, "Do it!" Moreover, why can’t we use our feelings and emotions to our advantage? Well, we can, and that’s what we discuss in Chapter 10 on trading psychology.

Remember that learning is experience-based. We can all remember the most extreme of our teachers at school, right? You can recall the funniest, the scariest, the prettiest and the ugliest, but I’ll bet you have a problem remembering anything about the teachers who were somewhere in the middle—those who barely made an experiential impact on you in years of being in the same classroom!

The same applies to trading. A lot of the learning involved in trading is experience-based. In fact, the most pertinent form of learning about trading is experience-based. It’s through the extreme experiences that you find more out about yourself in good times and bad. Most brilliant traders have had terrible experiences but, crucially, have stepped back up to the plate and applied what they had learned. Just like me. I made a lot of money very fast, thought I was "the don" (tut-tut!) and then gave some of it back again! Believe me, then I didn’t feel too good at all, but did I learn! And more importantly, did I apply those lessons? . . .you bet I did!

So, remember, learning is based on experience, so allow yourself to get experience, which is what this book and our workshops are all about—building experience. As you continually acquire experience, apply it consistently, continually, and carefully.


You must be honest with yourself if you’re to develop into a decent trader or investor. A company has not made you make or lose money, so part of being honest is to cut out the emotions of trading. Ultimately, your decisions are down to YOU! No matter what you were taught, even if it was by someone who had no right to teach, you’re the one who’s in control, and when you look in the mirror, make sure you’re being true to yourself. I’ve always found that blaming other people never really helps, and in trading you’ll save yourself a lot of time if you can apply this lesson fast. Blaming the stock or the teacher or tipster only wastes energy and stops you asking what more you can do to improve your technique, your knowledge, and your performance. We’ll cover more of this in Chapter 10.


You must pre-plan each and every trade. By this you must know your:

  • maximum risk.
  • maximum reward.
  • breakeven points.

You also must plan

  • your entry point.
  • your exit point whether it’s to. . .
    • take profit or
    • stop losses.

With options trading, I tend to base any loss cut on the basis of the underlying asset. In most cases the underlying asset will be more liquid than the options chain, so it makes it easier to make your loss-cutting decision based on the price of the stock, future, or whatever the underlying asset is.

This pre-planning stage also embraces the choice of the underlying asset itself, the strategy you’re using, and using fundamental and technical analysis to assist you in the decision-making process. The most important thing, though, is to make a good plan and then stick to it by using massive. . ..

Discipline—the Key to Success

When you have had the patience to acquire the knowledge and apply the principles above, it’s imperative not to waste it all. You must be disciplined and apply that discipline rigorously each and every time.

This means that:

  • you do your pre-planning every time.
  • you use your (and others’) experience.
  • you do not deviate from your stated sensible plan.

In this way you are taking the first steps to becoming more mechanical. Discipline is the single most important part of trading. In other words, it is money management, and without money management, even the most sophisticated of trading systems will not work.

By sticking rigorously to sensible money-management principles, you will ensure that your losses are minimized and your profits are allowed to run.

By sticking rigorously to sensible money-management principles, you will ensure that you will avoid suicidal risk profiles. I’m often amazed at so-called experts teaching options strategies that have terrible risk profile curves. So let’s have a look at a risk profile and why it is so important to your success as an options trader. . .

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information

To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.


Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.


If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information

Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.


This site is not directed to children under the age of 13.


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information

If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information

Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents

California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure

Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact

Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice

We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020