Chapter 28: Lessons I Learned About Options

Book: Understanding Options 2E

Type: Chapter 28

Difficulty: Beginner

Reading time: 10 min

Core idea

The closing chapter distills Sincere’s accumulated experience into a short list of unromantic rules. Start with covered calls — they are the safest, most defensible entry strategy for most retail investors. Use protective puts more often than you do. Define entry and exit rules before every trade. Cut losses quickly and let winners run, but protect profits. Do not trade out of boredom. Above all: no one cares about your money more than you do, so monitor your own account.

Author’s argument: It is not how much you make that matters — it is how much you keep. Most traders lose money over time not from a single catastrophe but from the slow erosion of poor discipline.

Selling beats buying for most retail investors

Buying options requires being right on direction, timing, and volatility. Selling options (covered calls, cash-secured puts) collects premium and time decay — a structurally easier game with a smaller upside ceiling. For most retail investors, this trade-off is correct.

Discipline outranks cleverness

The traders who survive are not the ones with the best ideas. They are the ones with the strictest rules — defined exits, position sizing, no-trade days — and the will to follow them.

Why it matters

Options are an asymmetric tool: small mistakes are forgiving, large mistakes are catastrophic. A single oversized trade with no exit plan can erase a year of patient gains. The lessons in this chapter exist because Sincere — and most experienced options traders — paid in real money for each of them. Reading them in advance is the cheapest way to learn them.

The arithmetic of losses

A 50 percent loss requires a 100 percent gain to break even. A 75 percent loss requires a 300 percent gain. Discipline around exits is not a personality trait — it is the difference between an account that compounds and an account that grinds to zero.

Key takeaways

Key takeaways

• Start with covered calls — they are the most defensible entry strategy for new options investors.
• Selling options (covered calls, cash-secured puts) is structurally easier than buying for most retail investors.
• Check whether covered calls are allowed in your 401(k) or IRA — many plans permit them.
• Protective puts are underused — more investors should hedge their long positions with them.
• Define entry AND exit rules before every trade — cut losses quickly, let winners run, and protect profits.
• No one cares about your money more than you do — monitor your own account and never delegate that responsibility.

Mental model

click to zoom

The disciplined options trader's loop — rules-driven from entry to exit

Read it as: Every trade passes through a sequence of rule checks before, during, and after entry. The discipline is not the rules themselves — it is treating them as non-negotiable. Skipping a check is how accounts blow up.

Practical application

1. Start with covered calls if you own at least 100 shares of any stock. Sell a 30-day OTM call against your shares. If it expires worthless, you keep the premium. If it gets assigned, you sell shares at a price you already approved.

2. Add protective puts during high-uncertainty periods. Before earnings, before major economic data, or when you have unusually large gains to defend.

3. Write exit rules in plain text before entering. “Close if option loses 50 percent of premium” and “close at 75 percent of max profit” are concrete rules. “I’ll see how it goes” is not.

4. Cap position size at 1 to 2 percent of account per trade. This is the difference between a survivable bad trade and a portfolio-altering one.

5. Resist trading out of boredom. Some weeks the best strategy is no strategy. Sitting in cash is a position.

6. Review every closed trade. Win or lose, write one sentence on what worked or what failed. Patterns emerge quickly.

7. Reconcile your account weekly. Catch broker errors, assignment surprises, or unexpected fills before they become problems.

The six final observations

Sincere closes with reminders that read as common sense but cost real money to internalize: it is not how much you make but how much you keep; no one cares about your money more than you do; practice before investing real money; protect profits; cut losses quickly; never stop learning.

Example

A first-year trading plan, rule-driven

A new options investor with $25,000 and 100 shares of a $50 stock writes the following plan and follows it for one year. Strategy: only covered calls and cash-secured puts on liquid large-cap stocks. Position size cap: $2,500 per trade (10 percent of account, but only on cash-secured puts that are fully collateralized). Entry rule: only sell options with at least 25 days to expiration, only at strikes with delta between 0.20 and 0.35. Exit rule: close at 50 percent of max profit, or roll if the underlying threatens the strike. No-trade rule: skip the week of major Fed announcements and the day before any holding’s earnings. Review cadence: weekly account reconciliation and monthly journal review. After 12 months, the trader has executed roughly 25 trades, won on about 70 percent of them, and produced a 12 percent annualized return on the options sleeve. The plan worked not because it was clever, but because the trader followed it. The same plan executed without discipline would have produced very different results — usually worse.

Related lessons

Related

Chapter 27: Where to Get Help Free resources to keep building the foundation that these lessons assume. Concept: Covered Call The recommended starting strategy in depth. Concept: Protective Put The underused hedge Sincere believes more investors should use.