I remember back in college when I was taking a corporate finance course, I was introduced of the world financial options. This topic was taught during the last classes of the semester, and it only covered the basics and payoff at expiration.

I remember struggling with the basics: long and short positions of calls and puts. It took me some time to learn what short puts were. I don’t want to brag, but I aced the final exam.

Moving forward three years, I began experimenting with stock trading, mostly with big market cap technology companies. I’m always exploring new investment opportunities. Seeking to find higher return alternatives, I landed once again on options while surfing the wallstreetbets subreddit.

Here, people share their experience with very risky option trades. Some lose a lot of capital; others upload their return from paper trade accounts with hopes of grabbing users’ attention. It is a mix of many things.

To be honest, there is little worth to be obtained from this form. I find myself reading the comment only for the hype and to learn about the market sentiment.

This subreddit got me thinking: what if I can get into options trading and multiply my capital with high return derivatives?

My Approach to Financial Options

Next, I was exploring my library looking for my “go to” corporate finance textbook and started reading the chapters about financial options. This is Corporate Finance by Jonathan Berk and Peter DeMarzo, an excellent introduction to the world of finance.

Learning about financial options is not easy. If you want to understand the science behind option pricing, the time value of an option, and the role of options in corporate finance (to name a few examples), you have to take the time and explore the subject patiently.

Understanding the basics is key to building a solid foundation in options. First, you have to understand what options are. Call options give the holder the right to purchase an asset at some future date. A put option gives the holder the right to sell an asset at some future date. The option holder has no obligation to exercise the option –sometimes it is better to sell it. Other times, options can turn out to be worthless if they are deeply out of the money.

Once the basics are out of the way, I recommend learning the option payoffs at expiration. Given the asset price and the strike price, find the intrinsic value and how it change if you’re in a long or short position.

Just like with stocks, it is very hard to time options. You are never certain if the value is going up or if the option will end up expiring worthless. Here are my thoughts on timing the market.

After this, things get a little complicated with the Put-Call parity. Here you learn how to price put and call options. Knowing about fixed income products, the time value of money, the expected value, and volatility helps a lot.

The Best Way to Learn

For me to understand and internalize what I’m reading, I have to apply the information with different exercises and real-life cases. Every time I encounter a formula, I model it in Excel and play with the independent variables to understand how they affect the outcome. In addition, I add notes with the IF function to make it easier to interpret the results of a particular scenario.

This is an overview of what I’ve been up to in financial options. If you are learning about financial options, remember to learn the basics before deep-diving into the complicated valuation world. The book I’m reading leaves financial options for the last section for a reason: it is necessary to learn other topics first before one can fully understanding options.