What's Wrong With Options Education
The options industry spends an enormous amount of money trying to educate the masses on how to trade options. But what if I told you that they’ve made a fundamental mistake from the very beginning?
In this video, I’ll explain what’s wrong with options education. Specifically, how the industry has missed a key ingredient at the very foundation of your learning process that creates an underlying confusion which prevents you from fully understanding the product.
So even if you took all the available training out there. Even if you spent hundreds of hours and a lot of money trying to learn, you’d be left with the same simple and logical question that EVERYONE asks.
How is that even possible?
How is it possible that everyone who tries to learn options ends up with the same options question?
The reason – options education is incomplete. Amazingly, with all that money spent on options education, the industry doesn’t offer a simple answer.
What’s more shocking is this - If you’re guessing at the answer (and most investors are), then it guarantees losses over time.
This is the EXACT reason why investors lose money trading options.
Even worse, this question has opened the door for online “experts” to come up with their own answers by twisting facts and leading unsuspecting investors into strategies they are ill-equipped to manage for reasons that are simply untrue.
So, not only am I going to tell you that simple question and inform you of something that you may not realize, I’m going to give you the answer. I’ll also set the record straight about the false statements being perpetuated by options experts.
This is guaranteed to be the most important options video you’ll ever watch.
Are you ready?
What is the fundamental flaw in options education?
Over the years, I’ve taught options to thousands of people … from beginners to seasoned professionals. For those that had attempted to learn options but failed, I realized that the available options education was causing great confusion at the very foundation of the educational process.
The available education doesn’t do a great job with providing you a framework for learning options.
A lack of an easy to understand framework prevents you from fully comprehending where you fit in the options world, what your ultimate goals should be, and what specifically you need to know in order to effectively use the product.
With so much options information being thrown at you, it’s no wonder that you and everyone else gets confused. So let’s clarify a few things from the start.
We’ll start with 4 important points.
- Options are the most important investment product of our time.
The main goal of investing is to try to make profits. Investors put enormous effort into finding investable opportunities for their capital. The most successful investors put equal effort into making sure that their capital is safe, and that the reward of any investment outweighs the potential risks of that investment.
Options are such an amazing product that, if used correctly, can also transform a good idea into a fantastic risk-reward opportunity.
The greatest trade in the history of Wall Street was an options trade on the collapse of the housing market in 2008. While shrewdly betting on the collapse through stocks or bonds made you a significant return, options allowed a few investors to make hundreds of times their initial investment, turning many of them into instant Billionaires.
Understanding options is just as important as understanding the actual investment. They’re key in helping you manage the risk of the trade and maximizing your potential rewards.
2. There are two ways to trade options.
This point is critical, and we’ll spend a little more time here to make sure you understand.
There are two distinct ways to trade options. You’re either using options to trade the “Volatility,” or you’re trading options for the "Directional Leverage” they provide. Same product, just different approaches. I’m an options expert and have extensive experience in both approaches.
Trading options for Volatility is done by the investment banks, a handful of hedge funds, and what’s left of the individual market-makers on the options exchanges. At the investment banks and hedge funds, options volatility is traded by highly intelligent mathematically inclined people from the top schools around the world and only after years of training.
Now, it’s very important to understand how a Volatility Trader makes a profit. Volatility Traders use complex mathematical formulas, such as the Black Scholes formula, to make daily decisions and adjustments. They trade constantly changing risk factors known as “the Greeks” – the Delta, gamma, Vega, theta, Rho with expensive software and programs.
They’re less concerned with where the stock is headed but rather on HOW it gets there. They even build models to attempt to forecast such movement.
Volatility Traders are non-directional traders who profit from accurately predicting the measured movement of the stock. Due to the mathematical nature of their approach, these traders are looking to profit over a very large sample size of trades. So unless you’ve went to a top university, are mathematically inclined, and want to get an options trading job a top investment bank or at a hedge fund that specifically trades volatility, then YOU are looking to trade options for directional leverage.
What does that mean?
Unlike the Volatility Trader, Directional Leverage Traders – YOU - care about the direction of the stock.
Buying Leverage is about risking $1 to make multiple times that amount, while selling leverage takes in money with the anticipation that any losses won’t exceed the amount you took in. Whether you buy or sell leverage, profits or losses are determined by the location of the stock at any given time. How the stock got there doesn’t necessarily matter.
99% of the people who trade options - YOU, any retail investor, and most hedge funds - are trading the leverage. Whether they’re buying the leverage or selling it, they’re not trading the “volatility.” Prominent strategies like Call overwriting, Buy-writing, Put Selling, Portfolio Hedging, or any strategy that plays the direction of the stock is using options to trade the leverage.
Here’s a quick test… A Goldman Sachs options trader is what type of options trader?
- Volatility trader or
- Directional Leverage Trader
Well, it depends.
If he’s trading at Goldman Sachs with Goldman Sachs capital then he’s trading Volatility. However, if he opens up his own personal options account to buy options then what type of trader would he be? He’s still employed by Goldman Sachs – that didn’t change. But if he’s betting on the direction of a stock in his personal account, then he’s trading options for leverage.
When I traded options at the investment bank – I traded Volatility.
When I traded options at the hedge fund – I traded Directional Leverage.
Now that you understand that there are two very distinct ways to trade options and profit from them, you’ll be better able to understand the next point.
3. Options is not a Zero-sum game
When you buy stock from someone there is a winner and a loser depending on the path that stock takes. Stocks are said to be a zero-sum game – someone wins while the other loses.
Options is nota zero-sum game.
The whole Options industry was built on this premise: If you and I enter into an options trade where you trade Leverage and I trade Volatility, then we can both win because we are essentially playing two different games. You’re playing “Where did the stock go?” and I am playing “How did it get there?”
Here are the two ways to look at the same stock using options from different perspectives:
If you buy options to profit from this stock going higher and the stock goes much higher, then it’s highly likely that you’ll profit.
If I sold you the options as a volatility trader, it’s unclear whether this would result in a profit or loss for me because I would have to look at how the stock got there. Did it get there like this or like that? It will depend, but it’s possible that I profited as well.
It’s always better when both parties win, but there can be other scenarios including lose-lose.
Generally, Wall Street is made up of the buy-side (clients include hedge funds, corporations, insurance companies) and the sell-side (investment banks). The investment banks are trading volatility and the buy-side is mainly trading DIRECTIONAL leverage. They can coexist trading on opposite sides because they are playing two different games with different goals.
When you trade options from your online trading account, the other side of that trade is most likely an investment bank or hedge fund. They are trading volatility while you’re trading direction. They want nothing more than for you to win in order to keep playing. Recall, they make their profits mathematically over a very large sample size.
The last point sheds further light on how and why the available options education is misdirected.
4. There’s a major disconnect with options education - in how we use options, who teaches it, and what we’re taught.
You now understand why and how you’ll use options. Options are an amazing product that helps you manage the risk reward of your investments. You’ll also trade options to leverage the directional risk of a stock or a portfolio. Now you have to learn about the product. And here’s where another problem arises.
There are many fantastic options books that are considered the “best.” And they’re very good – but they miss the mark for how you actually use them. Why is that?
Let’s go back a little.
In the 1970s, options were a fairly new product without any formal education. That changed in the 1980’s with a firm called O’Connor & Associates. At the time, O’Connor was considered the preeminent options trading firm on Wall Street with the best educational training program. The education was taught by options traders and focused on the various risk factors inherent in the product. It was intense.
Most of present day options education found its roots from this gold standard training program. By the late 1990s, as the product’s popularity grew options education became more main stream. And by 2010, hundreds of millions of dollars had been invested in the options education process with the goal of helping investors understand the product and use it to maximize their investing potential.
The results are mixed.
While options volumes have made a dramatic increase over the years, options education has failed to teach most investors how to effectively use the product. In fact, it seems to have had the opposite effect.
Options education has confused and scared many investors from actually trying the product. And for those that have tried the product, you hear many anecdotal stories of investors losing money. Today, Options users make up only a small fraction of the total population of stock investors.
The industry made a big mistake. From the very beginning. Much of the education tried to mimic a lot of the educational program established by O’Connor. Unfortunately, this was the fundamental flaw.
While the options education at O’Connor was top notch it focused on the Greeks and was geared toward the “market maker” – or a Volatility trader. And as we now know, we are notVolatility traders.
Over the years, options education has tried to reach the average investor (a directional leverage trader) by transforming itself around the Greeks.
Why did they do this?
Think about who the options educators are. They’re generally former market makers or volatility Traders. And remember Volatility traders profit differently than we do. They come from a trading background that focuses on the Greeks and movement. That’s not how the masses use options.
Options education has essentially been trying to stick a square peg into a round hole.
Now I won’t say that “understanding the Greeks isn’t important.” They are! But just on a conceptual level. The Greeks play a much smaller role in the game most of us want to play – the directional leverage game.
Listen closely, the roots of Options education come from the Volatility Trader. Since we now know that YOU and the Volatility Trader will look to profit by using options in very different ways then we can understand how there is a fundamental flaw at the heart of the existing options education.
And no matter how much money you throw at the problem… the desired results won’t happen unless the industry fixes it.
The Simple Options Question that the Industry Doesn’t Answer
Now I’ve made a big statement that there is a fundamental flaw in options education. I guess I also need to prove it. So here goes.
Besides the fact that most people get confused when learning option, never gain enough confidence to use them, or lose money trying, the greatest proof that there’s a fundamental flaw in options education stems from the fact that everyone looking to buy an option is left asking the same question without getting a simple answer.
So, after you understand why you should use options.
After you understand how you’ll use options.
And after understanding everything you need to know in order to make an options trade.
You’re left staring at an options chain with a choice. Trying to choose one option from a number of different opportunities. And that’s where the fundamental flaw in options education appears (because you can only mask a fundamental flaw for so long.)
At the point of choosing the option you want to buy, you’re left with a choice that you haven’t learned how to answer correctly.
You and everyone else asks the simple and logical question:
“Which option do I Buy?”
Now try finding an answer that makes sense. You won’t. I know that sounds incredible. But it’s true. Such a basic question without a straight answer?
And even more incredible, not knowing this answer and guessing will lead you to guaranteed losses. Most investors (perhaps you?) are guessing.
How is that even possible?
Take a second to absorb what I’m telling you.
Listen, you may get an “answer,” and an explanation, but as an expert doing this for more than two decades, I assure you that asking 100 experts the same question, will yield many different answers. Surely, some will tell you the same option because there might only be 4 or 5 choices… but their reasoning, or how they reached that answer, will differ.
And they usually start by incorporating the Greeks which makes it even more confusing.
So the next obvious question is - why can’t you get a simple answer?
And why isn’t there a standard process to find the answer?
Let’s connect the dots again!
Options Education has been the square peg trying to fit in the round hole. When you’re a Volatility Trader you learn exactly how to find the option which fits best for you. And you get that answer by understanding and analyzing the Greeks. It’s not the same for a Directional Leverage Trader. The Greeks won’t give you the answer like they do for the Volatility Trader. So, the industry doesn’t answer the simple question because it can’t find the answer in the Greeks, which is what they teach. In fact, the most common answer given by industry experts is an open ended answer like ”it depends.”
Well, it does depend!
It just doesn’t depend on the Greeks.
Look, the industry does a great job of teaching you what I call the “rules” of options. It teaches you how to play. But, once you know how to play, you have to learn how to play the right way. How to put the odds in your favor.That’s what options education lacks!
Can you pick one option and buy it. Sure. That’s easy! But do you have the confidence that it’s the right one? Options education fails you here.
Think about the game of chess.
I can show you the rules and teach you how to move the pieces; however, you’ll have to make your own decisions when we start the game. Not just on how to move those pieces, but more importantly, how to move them to gain a strategic advantage.
Here’s the kicker…
Because there’s no clear-cut answer to this question, leaving almost everyone confused there’s been a shift over the last 10 years to lead investors to Sell options. Why is that?
The pitch to Sell options is a lot easier and most alluring.
Online options “experts” have taken facts and twisted them into a narrative that isn’t true and actually quite dangerous.
From Buying to Selling
Today, most options products or strategies you hear people touting involve selling options.
Did you know that 20 years ago, options education was generally geared toward helping people harness the power of options - by buying them? Why do you think that is? It’s because the Smartest Investors in the world are generally buyers of options. They understand how powerful the product can be if you understand how to use them.
Options education has failed here. And this left the door open for many experts to steer the ship in a different direction. Options education has shifted toward showing people how to sell options. And why not? It’s easier to teach. Has an alluring pitch. But often comes with great (unmentioned) risk.
Online “experts” that lead investors to sell options use 3 facts:
- Options are a decaying asset.
- You can sell certain options and win a very high percentage of the time.
- Implied Volatility is generally higher than Actual Volatility. In plain English, they are Expensive.
These 3 Facts are twisted into a narrative that goes something like this:
“Profit on 70 to 90% of options trades by selling them. Learn why they are inherently expensive and take advantage of the fact that they decay in value every day.”
I am sure you’ve heard this pitch. And it is quite enticing. But, you are not hearing the full story.
Some even go as far to say that fact #3 is your Volatility Edge. This is absolutely not true!
And anyone saying this is being incredibly irresponsible to unsuspecting investors.
Listen closely, you now know that the Smartest Investors buy options when the opportunity presents itself. You should not be selling options until you understand what they know. Then, and only then, should you make the decision to sell options and inherit the risks involved.
Keeping it Simple
By helping you understand how options can be traded in two distinct ways and showing you the simple question where everyone gets stuck, you can begin to appreciate the importance of having education that is geared toward the way you use options.
Whether you decide to buy or sell options, you are a directional leverage trader. Your edge lies in your ability to find and hit a Target Stock Price within a certain Time Frame.
As you’ll learn, Options are simply a tool to magnify and extract that Edge.
I’ve spent the last few years teaching options at the highest level and perfecting the educational process that helps investors understand this. It’s become my mission to teach all investors the right way to use options. And it starts with Optionsgeek.com.
OptionsGeek.com is about keeping it simple.
There you’ll find new concepts and one very important NEW formula that revolutionizes options education and makes options much easier for you to understand.
It also helps you find the Answer to our Simple question.
But it doesn’t stop there.