Why do professional option trading companies tend to generate more constant returns compared to private investors? And why do private investors usually lose? Option trading is a zero sum game, so where does this discrepancy come from. The answer is volatility. Professional traders have a deep understanding about volatility. The price of a call- or put option is dependent on several variables like; the price of the underlying stock or index, the strike, the time to expiration, the interest rate and volatility.
Understanding volatility is important to become a good option trader. Most private investors I've met in my life use options as a leveraged directional instrument. That is, an instrument to speculate on the direction of the underlying stock or index. If you ever traded options, you might remember the frustration that even when you got the direction right, you still lost money on your options.
That's why professional option traders don't pick a direction. They trade delta neutral (no favor in underlying market direction). When you create a delta neutral position with options you trade volatility. That is the key difference. Mastering this concept takes some time, but it is not extremely difficult per se. In my book "Option Trading and its Applications" I explain everything there is to know to master these concepts.
The topics discussed are: pricing options, volatility, the Black-Scholes-Merton model, option greeks (delta, gamma, theta, vega, rho, vanna and charm), hedging, arbitrage, skew, delta neutral trading, option strategies, spreads, expiration and position management to name a few.
After reading my book, I am confident that you will be able to become a better option trader and compete against the best market professionals. The book is currently available Dutch and will be available in English very soon. Good luck!
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.