Getting Started in Options

Author: Michael C. Thomsett Categories: Options, Beginners

Quick Summary

A comprehensive introduction to stock options for individual investors, covering calls and puts, opening and tracking positions, buying and selling strategies, stock selection for options trading, volatile market strategies, combined techniques (spreads, straddles, strangles), and personalized strategy selection. Thomsett emphasizes a four-step evaluation process -- mastering terminology, studying risk, observing the market, and setting personal risk standards -- while making the specialized language of options accessible to newcomers.

Detailed Summary

Michael C. Thomsett's "Getting Started in Options" (Fifth Edition) is a bestselling introductory guide to stock options that has been refined across five editions based on reader feedback. Published by Wiley as part of the "Getting Started In" series, the book has established itself as one of the most accessible entry points into options education, with particular strength in demystifying the specialized terminology that creates barriers for new options traders.

Thomsett frames options as "an investment with many faces," acknowledging that options can take forms ranging from extremely conservative to highly speculative. He challenges the common characterization of options as inherently risky, arguing instead that specific strategies within the options universe span the entire risk spectrum, and that the appropriate strategy depends on the investor's risk tolerance, capital, objectives, and market outlook. The four-step evaluation process he prescribes -- (1) master the terminology, (2) study the options market in terms of risk, (3) observe the market, and (4) set a personal risk standard -- establishes a disciplined framework for approaching options.

The book opens with a thorough treatment of the two fundamental option types. Calls (the right to buy 100 shares at a fixed price) and puts (the right to sell 100 shares at a fixed price) are explained through the lens of equity and debt investments, with options positioned as a distinct third form of investment with unique attributes. The coverage of contract specifications, expiration mechanics, exercise and assignment, and the distinction between intrinsic and time value provides the foundational vocabulary for all subsequent strategy discussion.

The buying chapters (Chapters 3-4) address call buying for speculation and leverage, and put buying for speculation and portfolio protection. Thomsett discusses the risk profile of long options positions (limited loss, theoretically unlimited gain for calls), the impact of time decay on long positions, and the criteria for selecting appropriate strike prices and expirations. The treatment is practical, with numerical examples showing how changes in the underlying stock price, time to expiration, and implied volatility affect option value.

The selling chapters represent the more conservative end of the options spectrum. Covered call writing (Chapter 5) is presented as an income-generation strategy for stockholders, with detailed analysis of return calculations, opportunity costs, and the risk/reward profile across different moneyness levels. Put selling (Chapter 8) is positioned as an alternative to limit-order stock buying, where the put premium effectively reduces the purchase price of shares the investor is willing to own.

Stock selection for options trading (Chapter 6) receives extensive treatment, as the underlying stock's characteristics fundamentally determine option strategy suitability. Thomsett covers fundamental and technical screening criteria, emphasizing that the best options strategies require appropriate underlying stocks -- a point frequently overlooked in options-only education.

The volatile markets chapter (Chapter 7) addresses strategies for high-volatility environments, including hedging techniques, portfolio insurance approaches, and strategies that profit from large moves in either direction. The combined techniques chapter (Chapter 9) covers spreads (vertical, calendar, diagonal), straddles, strangles, and other multi-leg strategies, with clear profit/loss diagrams and breakeven calculations for each.

The final chapter on choosing your own strategy serves as an integrative framework, helping readers map their personal situation (risk tolerance, capital, market outlook, time availability, and investment objectives) to appropriate strategy selections. The glossary provides comprehensive definitions for the specialized options vocabulary introduced throughout the text, serving as an ongoing reference for readers as they develop their options knowledge.