Insurance, rain checks and bus transfers all have what in common?
They’re all a variation on options! In The Rookie’s Guide to Options Chapter 1 answers the rather simple question of what an option is. Something every trader needs to learn prior to diving into the world of options trading…kinda hard to trade what you don’t know!
Wolfinger’s laser like focus provides a clear definition on what constitutes an option and it’s awesome. As he promised in the introduction he sticks to clear and easy to understand language.
You have the right to…exercise your option
Clarification on the responsibilities of both option buyers and sellers is key to providing a strong base of options education. Understanding who has an obligation in an options transaction is foundational to grasping your responsibilities as an options trader.
I’m a seller of options. Every time I push the “confirm trade” button, I’m taking on an obligation to the buyer of the option. I get paid some money (called “premium”) for taking on the risk associated with the option.
The take away is I’m under an obligation to fulfill the terms of the option. If the buyer of the option decides to exercise, or execute, their option then I’m required to either buy or sell the underlying security (stocks in my case) from the buyer.
The buyer, however, can either choose to exercise or not exercise their option. They are not under an obligation like the seller of the options.
Wolfinger’s everyday life examples, which I mentioned in the beginning, are great for explaining how people use options in their day-to-day lives. These examples are great for creating a bridge between the sometimes confusing world of options trading and everyday life.
Quiz time…Number six through me for a loop!
As promised there was a quiz at the end of the chapter…I was stoked to see what tricks were going to be thrown my way! The questions were challenging but not too much, just enough to force your brain to work a little. The best part? They reinforced the reading material.
You don’t need to be a college math whiz to complete the quiz. Trust me, I’m not. It took me two times through calculus to pass! Every question can be linked back to the text you just read and are a mix of principals and practical application.
Bring on Exchange Traded Funds
The next chapter is on exchange traded funds, commonly called ETFs. These are similar to mutual funds because they are a single security made up of multiple other stocks. The big difference is people like you and I can trade them on markets like a regular stock.
Grab a copy of Rookie’s Guide here to join me on the journey of learning options trading and finding financial freedom! Subscribe to this blog at the top of the page and get the latest updates on how my options education is going.