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Option Trading: Are there prerequisites?

Suppose someone were to ask, "How much do I have to know before I can begin learning to trade options – with a reasonable chance to make some money?"

Would you be able to provide a satisfactory answer?  This is the question that haunts me tonight.

I have no preconceived notion of which specific items must be understood before anyone can begin a program of options education.  I assume anyone can start reading or attending a seminar that's truly targeted to people with no knowledge of options.  If that person gets lost immediately, it's reasonable to assume that prerequisite education is lacking.  That's often easily overcome.

But surely when anyone seeks information about trading options, it should be taken for granted that a certain level of sophistication has already been obtained.  That must includes the process of buying and selling in the marketplace.  

For example, being able to read a market quote and recognize the bid price and the ask price.  Or understanding that it's not mandatory to pay the asking price and that you may try to pay (bid) any price that suits your fancy.  It's also should be understood that a limit order may not be executed and that you may end the day empty-handed, i.e., with your order unfilled.

How do you put that into words?  To me, you don't do it.  I assume  that any person who wants to begin learning how options work and how to use them has at least a rudimentary understanding of how the stock  market operates.

I would expect that someone who has never traded or invested and who has no knowledge of such things would make that clear at the start.  It's ok to begin your trading education with options, but most people begin with stocks.  The point is that there are some basic assumptions I make when teaching options – and I cannot make a list of such items.  It's a vague area.

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I received the following questions via e-mail.  The 2nd arrived after I replied to the first.

  • How do I start to trade index iron condors?
  • You mention that iron condors is not a zero risk strategy.  How is it possible to lose money with iron condors?


I'm very literal.  Perhaps that's my problem in this instance, because my immediate reaction was:  Are you kidding me? You want to trade iron condors and you have no concept of how they make or lose money?

I took that second question to mean: "I thought it was impossible to lose.  How can anyone possibly not make tons of money using this strategy?"

I quickly began writing this post, being very upset at the entire situation and wanting to lash out at those who don't take time to acquire an education before placing money on the line.

Then it dawned on me that I must have missed something in the message.  Perhaps it's simply a misunderstanding and the question was really: "What must go wrong to end up with a loss and not a profit?"

That is a sensible question that should be asked by someone unfamiliar with the idea of selling credit spreads.  The literal mind misunderstood the question and was ready to respond in frustration.  Via e-mail I gave a polite, easy-to-understand reply, but I began this post when upset.

I feel better now, happy that the questioner – who does have trading experience in forex – asked a good question – but in words that I initially misunderstood.

***

I still feel too many people trade first – and make an attempt to understand later.  If that describes any readers, I urge you to read this blog, visit the CBOE or OIC.  There is good educational information available at little, or no cost.

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