The Options Chain: Why Everyone Gets Confused
Without a doubt the Options Chain is the most important tool used by anyone trading options. Unfortunately, it's the spot where everyone looking to buy options gets confused.
This lesson will highlight where the confusion starts, why people get confused, and how you can finally get the answers you need.
Two Questions Everyone Asks
There are endless amounts of free and paid options trading tutorials on the market. Investors spend an enormous amount of time trying to understand them. Some investors spend well over 100 hours pouring over the information.
Here's the problem...
First, no matter how much time you spend watching these videos, listening to these online "gurus," or tackling the education distributed by the Options Industry, you’ll end up asking the same two questions.
They are the two most important options questions that separate you from the best in the world:
- When do I use options?
- Which option do I choose?
In the previous lesson, I waked you through an AAPL example highlighting the difference between options vs stock. In the example, I gave you the option that would be analyzed. But how did I choose that option?
Every Idea is Not an Options Idea
In an earlier lesson, I explained to you where the Top 1% gain their edge. One of the areas was in the choice between using options vs stock. They know which ideas should use options, which implies that every investment idea is NOT an options idea.
That question goes hand in hand with follow up question which forces you to choose the right option to buy.
Guessing at the Most Important Options Question
As I’ll show you in a moment, investors are given a choice of many different options. The top investors understand which one to choose and why that option is the best one for them. More specifically, the choice option has the best risk-reward profile that shifts the odds in their favor.
Unfortunately, most investors can't answer these questions and wind up guessing at the answers. Guessing with options leads to long-term losses. It's mathematically guaranteed.
The Options Chain
Whether you’re a beginner or expert, everyone who uses options winds up at the Options Chain. It contains all the options for any particular stock.
On the Options Chain you will find the strike price, the expiration date, and the options premium. You may also find today's options contract volumes and Open Interest, which are the current outstanding contracts between two parties.
This is a basic Options Chain for AAPL stock. Notice that this is where we chose the AAPL March 22nd $180 Calls for $1.33, in our previous example.
All options chains look fairly similar. Robinhood tried to do something different.
Robinhood Recognizes the Problem
Kudos to Robinhood.
When building their app, they recognized that the average investor was confused at the Options Chain. So, they slightly changed the process of choosing an option to lead the investor down an easier path to get to their final decision.
Here are the steps you take to trade an option on the Robinhood App:
Step #1: While looking at a stock you press "Trade."
Step #2: Press "Trade Options."
Here's where they changed it...
Step #3: Choose the Up or Down arrow to indicate the direction you think the stock is going.
They then only show you Calls if you pressed "Up" or Puts if you pressed "Down." By doing this they took away half of the options chain.
Step #4: They have choices for Expiration, let you scroll the Strikes, and let you choose whether you want to buy or sell. This is no different than any other Options Chain, Robinhood simply hides the other half.
And again, whether you use Robinhood's options chain or not, the process of making the final choice is left for you to figure out. How do you do that?
That's the problem.
The Right Way to Play Options
Options trading is like any other probability game. There's a right way to play and there is a wrong way to play.
For example, there's no "right" way to play any of the probability games at a Casino (besides poker). They are designed for you to lose over time. So, the answer is not to play at all.
To win money at any probability game you need to know and play the odds only when they are in your favor. This means that if you play a probability game and guess at your decisions, then you'll lose your money over time.
It's that simple.
Why Doesn't the Industry Give You the Answer?
The problem with Options is that most investors who buy options don't know how to choose the right option and explain why that's the right option. This means they guess when they are on the Options Chain.
And remember, if you guess, then you will lose over time.
Even worse, there's no education available that teaches you how to choose the right option.
Either the industry knows the answer and they're not telling you the answer, which means they're allowing options buyers to lose their money; or...
The industry doesn't know the answer and everyone buying options loses their money because they guess.
It can't be any other way. But either way, it's a problem!
In the next lesson, I'm going to bring you a little closer to the answer. It's important investment advice that will last you a lifetime.