One of the hardest part about options is learning how to think about options. If you learn to think about options in terms of risk/reward/probabilities, you’ll learn quickly.

Here are some steps to get you on your way:

  1. Start by reading as much as you can about options: books, websites, blogs, more books, more websites, more blogs. This first stage will help you get acquainted with common terminology and the ground-floor basics.
  2. Just teach yourself right now that there are three pillars that everything in options trading revolves around:
    1. Risk
    2. Reward
    3. Probabilities
      1. High Risk, Low Reward: High Probability of Making Money
      2. Low Risk, High Reward: Low Probability of Making Money
  3. Go back to everything you’ve learned and apply the risk/reward/probability relationship:
    1. What’s this strategy’s risk? What’s the reward? -> What’s the probability of making money based on the risk and reward?
      1. What happens when I alter the strategy to have more reward and less risk? -> What’s the probability of making money now?
    2. If you know a strategy’s probability of making money, work backwards and determine the proportion of risk relative to reward.
    3. If you own 100 shares of a stock for $100/share, what’s the difference between buying a 90 put and an 80 put? -> risk/reward/probabilities
  4. Now, start thinking about option prices in terms of their probability of expiring in-the-money:
    1. With the stock at $100, why is the 120 call cheaper than the 110 call?
    2. With the stock at $100, why is the 80 put cheaper than the 90 put?
    3. Why do option prices decrease as time passes?
    4. Why do stocks have different option prices (relative to the stock’s price)?

There are a lot of moving parts here, but understanding options at the core comes down to risk, reward, and probabilities.

Once you understand option mechanics, the next step is to formulate an approach to the markets, which comes down to what type of trader you are:

  1. Extremely active (multiple trades per day) or moderately active (a few trades per week or month)?
  2. Do you want to focus on buying options?
    1. Things to consider:
      1. Your losses will be more frequent than your profits, but your profits can be significant (or unlimited, in theory)
      2. Your success will come down to having a system that picks entries with a higher-than-expected success rate
  3. Do you want to focus on selling options?
    1. Things to consider:
      1. Your profits will be limited and more frequent than your losses, and your losses can be significant (or unlimited, in theory)
      2. Your success will come down to having a system that limits your drawdowns
  4. What products do you wish to trade? Individual stocks? Commodities? Broad market indices?

I know there’s a lot here, and I’m sure I missed things, but I hope you got something out of it.