How to Trade Options

Core idea

Thesis first, strategy second

Royal's whole framework rests on a sequence: understand the company → form a view on the stock → pick the options strategy that profits if that view is right. Skipping the first two steps and jumping straight to "this strategy looks fun" is how most retail options traders lose money. The strategy is the implementation of the thesis, not the thesis itself.

A useful thesis answers two questions: where will the stock go, and how fast. Direction alone is not enough; an option has a deadline. A correct directional call that takes 18 months to play out is a losing trade on a 60-day contract.

Fundamental analysis over technical patterns

Royal explicitly favors fundamental analysis — examining the business, its competitive position, its financials, and its valuation — over technical analysis of price charts. The reasoning: over short windows stock prices are noisy and unpredictable, but over longer windows they track business fundamentals. An options trader with a longer-than-typical perspective has a knowledge edge over the short-term technical crowd.

Match the strategy to the thesis precisely

Once you believe the stock will be at $X by time T, you can shop the entire options menu for the strategy with the best risk-adjusted return for that exact outcome. A modest upside view may favor a short put (collect premium, get exercised at a discount) over a long call (need a bigger move to break even). A high-conviction explosive upside view favors the long call. A "stock will stay in a range" view points to spreads or condors. Every strategy in Basic Options Strategies through More Multi-Leg Spread Options Strategies has a thesis it's built for.

Why it matters

A strategy without a thesis is a guess

Most ways to lose money in options reduce to: trader saw a strategy on social media, applied it without understanding what stock behavior makes it profitable, and discovered the hard way that the market wasn't cooperating. The thesis-first habit closes the most common loss path.

The chain shows you the menu of trade-offs

Once a thesis exists, the options chain becomes a price list of bets you can place. Bid/ask, last, volume, open interest, IV — each column tells you something about the liquidity, market consensus, and probable behavior of that strike. Reading the chain fluently turns "which option do I buy?" from a coin flip into a comparison shop.

Exit discipline matters as much as entry

A successful options trader closes positions on a plan: hit the profit target, the thesis is invalidated, the time horizon is half spent, or volatility has crushed. Drift — holding "to see what happens" — is the same as paying theta voluntarily.

Key takeaways

Mental model

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Practical application

Example

Three strategies, one thesis

Stock LMNO trades at $100. Your fundamental analysis estimates fair value at $120, and you expect the gap to close over the next six months. No dividend. Three strategies match this thesis:

Strategy A — Long $100 call, six months, premium $8 ($800). Breakeven $108. If LMNO finishes at $120, the call is worth $20 ($2,000), netting +$1,200 (+150%). If LMNO finishes at or below $100, you lose the full $800.

Strategy B — Short $100 put, six months, premium $8 received ($800). Cash up front. If LMNO finishes above $100, you keep the entire $800 (max gain). If it falls to $92, you break even. Below $92, you're obligated to buy at $100 — but a stock you believe is worth $120 at a net cost of $92 isn't a terrible outcome.

Strategy C — Bull call spread, long $100 call / short $115 call. Net debit, say, $5 ($500). Max gain capped at $15 − $5 = $10 ($1,000). Max loss is the $500 debit. Breakeven $105. If LMNO reaches $115, this returns +200% on a lower up-front cost.

The thesis is identical across all three; the trades aren't. Strategy A has the biggest upside if LMNO blows past $120. Strategy B pays cash today and tolerates flatness. Strategy C compresses the breakeven and turbocharges the return up to $115. Picking among them depends on how confident you are in the magnitude of the move and how much risk you're willing to size. The thesis is the input; the strategy choice is where edge is built.

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