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What is the Options Market?

Know This First

When it comes to options education, I feel that most are missing out on the foundational knowledge needed to truly master the options market.

It makes sense; most come into options looking for leverage and directional bets. Along the way some option "voodoo" will hurt them, and then maybe they'll try to learn the basics.

But it goes deeper than that.

The Big Difference

The options market is a completely different animal than most markets that trade.
Take equities for example. Companies will "go public" in order to raise capital to help build their business. Investors and speculators will then bet on the stock and sometimes the company.

The same thing occurs in the bond market. Let's say a government is looking to raise money, so they issue debt which is put on the market at a certain interest rate. Investors and speculators can then bet on the country and other traders.

These two examples show you how capital markets operate.

But the options market is not a capital market.

If you are new to trading options, ask yourself these 3 questions.

What Are You Trading?

The options market is a risk market.

So you can go out and reduce risk in exchange for paying a premium, or you can assume some risk in exchange for receiving a premium.

The options market is all about the premium of the option, because that is the direct measurement of the perceived risk of the underlying stock.

This is a big deal. Read that sentence again. Most don't get it.

What are you valuing?

When you trade a stock, you consider the company, their growth prospects, and their fundamentals. You also may concern yourself with the psychology of the market and the structure through technical analysis.

With options you have to take all of that into account, and then look at the perceived risk in the market.

If the perceived risk is higher than what you think will happen, you should sell options.

If the perceived risk is lower than what you think will happen, you should buy options.

What do you care about?

With a stock, you care about where it will go.

With an option, you care about where the stock will go, how long it will take, and how fast it will move in between then.

If you can adjust for these extra variables and learn to structure option trades around a thesis, you'll have an advantage over 80% of the option traders out there.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/