So should you trade options?

This track has explained what options are without telling you to use them. That was deliberate, and here is the reasoning.

What options are genuinely good at

• Insurance. A put on something you own converts an unbounded loss into a known premium. This is the clearest legitimate use, and it is what the instrument was designed for.
• Defining risk precisely. A bought option has a maximum loss known on day one, which not many instruments offer.
• Expressing a view you could not otherwise express — about timing, or about volatility rather than direction.

What they are bad at

• Being a cheaper way to own shares. They are not. They are a way to rent exposure with a deadline attached.
• Generating reliable income. Writing options produces frequent small gains and infrequent large losses. Frequency is not reliability.
• Recovering losses. Using leverage to make back what leverage lost is the most consistently destructive pattern in retail investing.

Before you open anything

1. Be able to state your maximum loss as a number, in cash, before you trade.
2. Be able to draw the payoff at expiry on paper.
3. Know what happens if it finishes in the money — including whether you can fund automatic exercise.
4. Know what event is on the calendar before your expiry, because implied volatility already does.
5. Size it so that total loss changes nothing important. See position sizing.

The part that is not about mechanics

Options compress time. A share position that goes wrong can be waited out; an option position that goes wrong has a deadline, and the deadline removes the single largest advantage an ordinary investor has — the ability to be patient. See thinking in decades.