London Trading Group

London's Leading Trading Academy

Register now to get access to your free content.

No experience needed. We only show you what works.


Do I need to study “The Greeks” to trade options?

By 10th June 2019 News No Comments

In a word? Yes. In a few; Yes, you really do.

If you want to avoid losing all of your capital and keep your options open, you need to at least know what “the Greeks” are. If you want to do well, you need to study them in full. A common question asked during seminars is how much do you need to know before you start trading? What level of knowledge is the minimum? These questions always come from beginners who believe to  have seen others make money without putting in any work. They believe they can use a ‘practical approach’, some strategy that within a few hours will make them the Wolf of Wall Street.

It is a comparable situation to visiting a doctor and ignoring their advice since it seems like too much work. Then visiting another doctor, and ignoring theirs. Then keeping doing this until they find a charlatan who promises a magic pill to lose weight without any dieting. However, there isn’t an effortless solution, there is no magic pill.

It can be tempting to ignore the longer and duller correct answer until you think you’ve found a quick and easy solution. However, there isn’t an easy solution. Options can be a great thing but they are exceedingly complex. Without the right education, they should be avoided. An uninformed trader, only just entering the world of options, can do a lot of damage. Without the proper understanding of the risks and opportunities involved, you are risking an awful lot.

Options can be risky, but not if you’re informed. They involve buying and selling, but without the obvious indication of what is affecting the price. An option can’t move more than what it underlying it. As an example, an option on Microsoft couldn’t move more than Microsoft itself. There is risk, but it can be negated if you know what you’re doing. An educated person using options will be able to minimize their risk. There will be no uncertainty, as they know what it is they are trading and what is affecting it.

A newcomer can understand how to make money using stocks. If you purchase 1000 USD of Microsoft stocks, and they go up 10% then you stand to make a profit of 100 USD. This is fairly simple when everything is going to plan. Options, on the other hand, aren’t as easy. Using options to make money from the movement of an apple is very different from stocks. When using options, that same Microsoft movement might not necessarily make you money. The price of options will move based on many factors, the underlying price value is just one of these factors.

The Greeks are the instruments that help us see what is influencing our position. By understanding which factors are affecting the price, we have a better understanding of the risks facing an investment. Trading options without understanding the basic principles of what determines their value is asking to drive without being able to see the road; sooner or later you’re going to crash.

The books that cover these theories can be dry, they can long, and they can be a little boring. However, if they were half the length and much more exciting this still wouldn’t change the number of uninformed traders operating. The general level of ignorance will remain as long as people are unwilling to put the work in.

Trading educators often neglect to teach theory in their courses. Clients complain when they’re bombarded with this stuff, which can cause them problems. They are happier to keep those trying to learn in ignorance. Once they begin trading without any knowledge they ruin their portfolios. However, by then it is no longer the educator’s problem.

I am trying to encourage you to build your expertise first. Doing so can save you from complete finical ruin. Doing your homework now will teach you to assess the risks of potential investments. Even just a few hours of studying can illuminate why one previously fantastic idea is actually very risky. You will understand how time, volatility, and the underlying price all influence the value of an option. It will help you protect your money.

Learning this theory now will allow you to build on this. Then, learning about building an option strategy or managing risk properly can be built on a solid foundation of theory and expertise. A small amount of work now will lay the groundwork for success later.

Studying at the beginning of the career will save you a lot of time learning later in your career. If you enter into your career without any background knowledge, you’ll find yourself attempting to catch up for much longer. It is difficult to build greater knowledge without the baseline understanding of the topic. If you neglect theory now, later in your career you will have to spend much more time learning it.

If there was a magic strategy, a way to trade option that brings instant success without needing an understanding of the risks, every single person would be using it. There are no easy answers. However, a solid foundation of knowledge about the theory involved can set you up for a lifetime of successes.