The Missing Chapter in Options Education: What Every Investor Needs to Know (Part 2)
Felix Frey
Creating New Options Education | Helping Investors Generate High-Quality Risk-Reward Trade Ideas | Wharton Alum & 20+ Years on Wall Street
This is the second of a 4-part series (Part 1, Part 3, Part 4) that uncovers the biggest problem facing the options industry—why it exists, the critical answers that have been overlooked, and the collaborative solution that can transform how investors approach options. Volatility Trader? Start Here.
In Part 1, we explored how poker transformed from a game of chance to a process-driven contest of skill rooted in Mathematical Edge. Doyle Brunson demonstrated how understanding the game’s mechanics could provide a decisive advantage, while Chris Moneymaker’s victory revealed the immense leverage and opportunity within the game.
We then drew a parallel to Wall Street, specifically options, where a select group of top investors have quietly applied similar principles to gain an edge. Yet, much like poker before its transformation, the options industry has left most investors guessing at two critical questions:
Unlike poker, however, the options industry has yet to fully evolve. In this article, you’ll get the most important (and simple) options lesson no one receives upfront. We’ll uncover why the education is incomplete, how this oversight became the norm, and the players that need to rally together to create change.
Two Types of Options Traders
Options are traded by a diverse array of investors, each with their own strategies and objectives. However, the options market fundamentally revolves around two distinct approaches: volatility trading and directional leverage trading. Understanding this distinction—specifically, how each approach generates profits—is the first step every investor must take before diving into “Calls” and “Puts.”
Volatility Traders
Volatility traders focus on profiting from how a stock moves—its volatility—rather than where it goes. To achieve this, they adopt a delta-neutral style of trading, which minimizes directional risk and capitalizes on volatility changes.
For example, these traders actively trade both stock and options positions, adjusting stock holdings daily to maintain "neutral" exposure to price direction.
This style of trading is prevalent among market-makers and derivative desks at the investment banks, where portfolios often consist of hundreds or even thousands of trades. It is a highly specialized approach that differs significantly from the goals and capabilities of the average retail investor.
Directional Leverage Traders
In stark contrast, directional leverage traders focus on predicting where a stock will go. They use options to amplify their directional stock ideas, often holding far fewer positions. Unlike volatility traders, they don’t trade stock to hedge out directional risk—because getting the direction right is precisely how they profit.
For example, a hedge fund manager might use a call option to leverage a potential stock increase or a put option to capitalize on a potential decline. Their strategies are tailored to specific market scenarios, such as capturing upside potential, hedging a portfolio, or generating income through selling options.
Most hedge funds, institutional money managers, and individual investors fall into this category.
Just To Be Clear
This distinction clarifies the starting point for every investor.
Let me cut to the chase: unless you work at a Wall Street investment bank or a volatility-focused hedge fund, you are almost certainly a Directional Leverage Trader.
Moreover, looking at metrics like implied volatility doesn't make you a Volatility Trader. True Volatility Traders are immersed in delta-neutral strategies, managing complex portfolios with a primary focus on volatility changes—not directional price movements.
If your goal is to profit from where a stock goes (up, down, or even stays the same), hedge your portfolio, or generate income, then you are a Directional Leverage Trader.
Understanding this distinction is critical because it determines the type of education, tools, and strategies that align with your goals.
Here lies the bigger issue: Everyone receives the same options education that is incomplete, misdirected, and too complex for the average investor.
This lack of clarity leads to confusion—not just about the material, but also about the trading style you’re expected to adopt.
The #1 Misconception About Hedge Funds and Options
The term "hedge funds" often brings to mind sophisticated algorithms, fast-paced trading, and large options portfolios dominated by complex volatility strategies. In truth, this represents only a small subset of funds. The majority of hedge funds use options selectively and sparingly as tools to capitalize on directional stock movements.
It’s understandable for new investors to think:
“Citadel is a hedge fund. They are market-makers. They make billions. I want to trade options like Citadel.”
But here’s the reality:
Many investors might believe they can replicate Citadel’s market-making strategies, but it’s impossible to capture the same advantages.
Instead, they should focus on emulating equity managers who use options strategically—for profit, hedging, or income—when there’s a clear opportunity. With the right education, this becomes not only attainable but also a pathway to greater success.
Options Education Stuck in the Past
The foundation of options education was laid in the late 1970s, primarily designed for volatility traders, specifically market-makers. This framework centered on the Black-Scholes formula and delta-neutral trading strategies—an approach tailored to their needs, not those of today’s retail investors.
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As retail participation in the options market grew, the education failed to evolve. Instead of adapting to address practical questions like:
... the industry doubled down on complexity, perpetuating a system disconnected from the realities of most investors.
The following video illustrates this disconnect, showing how the industry often explains choosing the right strike price using a Volatility Trading concept—a method that lacks clarity and is largely irrelevant for most retail traders.
Consider another widely cited resource: Investopedia’s article Options Basics: How to Pick the Right Strike Price. While it takes a different approach, it ultimately delivers the same result—an incomplete answer.
It’s worth noting that these resources are ranked #1 on Google for terms like “How to Pick the Right Strike,” meaning millions of investors are relying on content that fails to address their needs.
Rethinking the Framework: Change Requires a New Perspective
The foundation of options education has remained largely unchanged since its inception in the late 1970s. Designed for market-makers, this framework focuses on the Black-Scholes formula and volatility strategies. It was never intended for today’s retail investors, who primarily aim to use options for directional leverage with simple calls and puts.
But the problem goes deeper than outdated material—it’s systemic.
Many of the key players shaping options education today, including institutions like the Options Industry Council (OIC), industry decision-makers, and even academia, are former market-makers or volatility traders themselves. Their expertise and trading experiences are rooted in a market-making mindset because that’s the education they were trained in. For most of them, this is the only framework that exists.
This isn’t a critique of their skills or intentions—volatility traders are exceptionally knowledgeable and have mastered complex markets. However, they are often unaware of the gaps in their teachings because alternative approaches to options trading, particularly those focused on directional strategies, are not part of their training or professional experience.
As a result, the education they provide, while valuable to certain investors, fails to address the fundamental questions option buyers grapple with:
Instead of empowering retail investors with the tools and frameworks they need to succeed, the current system continues to perpetuate a one-size-fits-all approach, leaving millions of investors guessing.
If options education is to truly serve its audience, it must evolve to recognize the different needs and objectives of retail investors—needs that lie outside the traditional market-maker playbook.
Bringing It All Together: What This Means for the Average Investor
The options market is at a crossroads. Just as poker evolved from luck to strategy, the options industry must evolve to meet today’s investor needs. This starts with education. But it’s not just about adding more material—it’s about teaching the right material.
There’s no doubt the industry has made tremendous strides. Record-high options volumes year after year and millions of new options investors are a testament to the efforts made through education, technology, and regulation. These accomplishments should be celebrated.
However, these successes also highlight the urgency of the moment. Now, more than ever, is the time to protect and empower investors by addressing two critical, yet often overlooked, questions:
By introducing new education tailored to today’s retail investors, the industry could pave the way for millions of potential participants still on the sidelines. This transformation could propel annual options volumes to unprecedented levels in the coming years—I believe it could even double!
The good news is that I’ve spent the last two decades doing the hard work—creating groundbreaking education and innovative concepts that simplify the process, help you focus on what truly matters, and equip you with the tools needed to align risk and reward effectively.
So, the question is: Are you ready to take the next step and unlock your full potential with options trading?
What’s Next: Getting Into the Specifics
We’ve uncovered the core problem in the options industry—a lack of clear answers for millions of option buyers—and explored why this issue persists: misdirected education rooted in outdated frameworks.
I’ve highlighted that hedge fund managers, who are primarily buyers of options, don’t rely on the traditional concepts taught by the industry, most of which stem from the Black-Scholes formula.
I even shared a video of Warren Buffett, a renowned option seller, candidly stating, “You don’t have to understand Black-Scholes... at all.”
In Part 3, I’ll connect these dots with real examples, revealing the "Options Secret" that top hedge fund managers use to gain an edge when buying options. Then, in Part 4, I’ll guide you step-by-step through the process to achieve that advantage for yourself.
Until next time,
Felix Frey, Creator of OptionsGeek
Student of Markets, Educator Writer Activist
1 个月The overarching problem of directional option traders is the loss of delta. If you are good enough to call direction, every option delivers delta less than 1, or, smaller return than the underlying. If you are good enough to call direction, "free" leveraged positions such as stock futures are more efficient.
Derivatives Trader / Leader / Problem Solver / Teacher
1 个月Felix Frey, nice piece, and you've obviously put a good deal of work into it - I think it is worthwhile to have a conversation about options education as it stands today. I have a few comments, mostly based in the root questions of your article- "When should I buy options instead of stock? and Which option strike should I choose? " You and I have had the beginnings of this conversation in another comment section, but I think the questions asked here are too reductive, even for someone who is starting out in options. If you're looking for a hard and fast rule as to which option to choose - a rule that always works - you are being myopic. It just doesn't paint the full picture. The dynamic nature of how option prices change, relative to perceived future movement, is a real factor that simply gets left out of that conversation if you are offering someone a solution like that without a balanced presentation of how the options move and why. I am certainly a product of the market-making mindset, but I'm also a big believer in the ability of the average consumer to understand the basics of the options, even the math that belies the contracts, when they are presented in original and thoughtful ways.