Options for everybody. Stefan Deutschmann

empty bags, than you had before. Books are often outdated or simply no longer up to date and seminaires are expensive pleasures that don't tell you a secret in the end.

      In 2018 I therefore decided to write this book and to dedicate it to an area that seems to have been somewhat neglected in the German-speaking world. Here in Germany, hardly anyone talks about trading options. I am well aware that "the German" has no great interest in the capital markets, especially not in equities. Often it stays with the savings book - that will have to do. So if the interest in equities is already so low, one can guess that the interest in options must be much lower. Wrongly, I think. Options are a great financial product which, if used correctly, can achieve a clear excess return over simple stock shares. In Germany it is a niche issue. The literature that has appeared in Germany has unfortunately become somewhat outdated, sometimes simply bad and often completely overpriced, or simply not practicable or suitable for the small private investor. Exactly this aspect I would like to try to change.

      The intention is therefore to generate as much interest as possible in this subject area and to get more people interested in options.

      What is this book and what it isn't? Will this book make you a millionaire? Certainly not, it takes a lot more than just reading a few lines. There has to be so much honesty. Nevertheless, it should help you to provide a well-founded and wide-ranging insight into the world of options. It is essential that you always remain curious and interested. A single book cannot teach everything there is to teach and to know about this specific topic. Not even 1.000 pages would be enough. However, care has been taken to ensure that everything is addressed that you need in order to set up your first trades and to obtain your first experiences of success. However, it is still a non-fiction “entertaining” book, so you will probably not be able to read it like a novel in one piece.

      In my opinion, a friendly relationship paired with a bit of humour and numerous examples is more suitable for learning than hours of frontal teaching. I try to live up to this claim here. I, too, was a bloody beginner and know your situation, so you will not be addressed from above, but directly and personally. The ultimate goal must be for you to understand what you have read and to be able to apply it! No one will be helped if you end up depressed and peppering this book in the corner instead of seriously dealing with the future.

      It is very difficult to construct such a book conceptually suitable for everyone, since the knowledge to be conveyed seems to be almost infinite. However, the attempt was made to create a logical structure that would first teach you the basics and then later deal with real examples and strategies that you could put into practice. Once again, it is a reference book, so there will be parts that will bore you or perhaps even overwhelm you in the beginning (keyword "the Greeks"). Don't worry about it, it's all the same to everyone, no master has fallen from heaven yet.

      The first chapters are theory-based and are intended to give you an understanding of the basic concepts of option trading. The greatest care is taken to convey this knowledge in a simple and practical way, although there are some topics that you simply have to go through. At the end of each section you will receive the most important information in a nutshell after the small hint "Remember". As soon as the strategies and trading approaches are discussed later, you can fall back on the cheat sheets and checklists towards the end of the book, print them out and stick them next to your screen.

      Now I wish you lots of fun and good luck with your first steps into the world of options.

      Happy Trading,

      Stefan.

1. General information

      1.1 A game of probabilities?!

      At this point you don't have to understand exactly what I will tell you in the following lines. If you've never been exposed to options in your life, it's no big deal. Actually, it might even be an advantage if you haven't had any points of contact yet. But before we even talk about options, I'd like to talk about how casinos and insurance companies make money. Now you're probably thinking, "Wait a second, casinos and insurance companies? What do I care? I'm here to make money." Just listen to me for a moment, after the example, you'll understand a little better what it's all about - promised.

      That's how casinos make money. It's absolutely simple and you probably already knew it, but they make money with small theoretical probability imbalances in each of the hundreds of games of chance. Simply put, if you know that the probability of a coin toss falling head or tail is 50%, the casino could pay you 10 USD if the coin lands on head, but 11 USD if it lands on tail. Either the casinos set the games so that the odds are in their favor or they either pay out a sum based on the odds of an event.

      Let's just have some roulette. Basically a roulette wheel has 36 numbered fields, black and red and probably you have heard in movies "I will go to Vegas and bet everything on red". Most of these roulette tables have either one, two or sometimes three green squares and either a zero, double zero or even triple zero. Have you ever noticed them? Basically, when you go into a casino, these numbers, these double zeros, triple zeros, and all that stuff tend to be in favor of the casino. If you bet on a color, the probability of winning is 1:1, so if you bet 10 USD, you can win 10 USD. Banally speaking, you win 100%. So you first assume that you have a 50% chance of winning, right? The reality is that in most casinos, especially American ones, the probability of hitting black or red every time is only 46.37%. This is due to the additional green areas on the roulette table.

      Another question to ask yourself in this context is: Why do casinos have table limits? They have table limits because they increase the number of games a person will play, which increases the house advantage of the casino. Look, the longer you play, the more you can lose. Casinos deliberately set table limits to control how often someone plays a game. The reason they do this is because they don't want you to come around the corner and bet, for example, directly 1 million USD on black or red. The risk would be much too high for the casino in this case. But if you would come for years and bet only 10 USD per game each time, then they would accept this bet in any case, because the statistics clearly play against you here.

      Or let's take insurance companys. Imagine you have car insurance for which you pay premiums year after year. How often have you actually used it and how much have you paid in? Insurance companies also work according to the principle of probability, calculate their risk and let you pay a corresponding premium. The statistics are also on the side of the other party.

      Why would you care about all this? What would it be like if you could also be the "bank" on the capital markets and exceptionally the probability theory could be used in your favour? Exciting, isn't it? Let's go on this journey together, everything will be explained to you if you are patient and eager to learn.

      Remember:

      The most reliable and consistent profits are achieved on the basis of probability and statistics.

      You can use these for yourself without being a genius á la Beautiful Mind or having studied math.

1.2 What is an option?

      First of all, I would like to talk about the absolute basics of option trading. You are probably an absolute beginner or have never heard that options can be traded and what they actually are. It is therefore important that we first understand what constitutes an option or an option contract at all.

      Why and for what purpose were options invented? In essence, they are intended to perform "administrative tasks", namely to minimise risk. This gives you the opportunity to hedge yourself, speculate or use the contracts as a form of insurance. For options trading, it is important that we clearly define and understand the benefits and risks of each position we take. So, what is an options contract? Options are simply a legally binding contractual agreement between a buyer and a seller to buy and sell shares at a fixed price over a period of time. This is the serious difference between options and shares in general. Trading at a fixed price and for a fixed period is agreed.

      Essentially,