Is it important to understand option pricing models before trading options?

I've utilized options on the retail level for well close to 40 years, starting with basic strategies and evolving into more complex strategies, particularly hedging. I wrote utilized because I have never been that typical perception of the 'trader' who has loaded up on cheap puts or calls, gunning for that big pay day.

Yes, options are complex financial instruments and it is essential to know what you are doing before trading them. Warren Buffett once called derivatives “financial weapons of mass destruction” yet he has made billions of dollars from using them.

The amount of knowledge that you need depends on the complexity of what you are doing. You don't need to know very much if you are a Level 1 option trader selling covered calls in order to sell your stock at a target price or selling cash secured puts to acquire stock at a lower price. These strategies are quite straightforward.

The next levels of option strategies (straddles, strangles, spreads, condors, butterflies, hedging) require more knowledge because for lack of a better description, they're more like chess than checkers.

Trading volatility as well as active hedging gets even deeper and is about the most complex that I have gone into.

Here are some generalizations applicable to these more sophisticated strategies. You need to understand:

• The interconnected relationship of options and different strategies

• How to use an option pricing formula (not the actual mathematics of one or more formulas)

• How options behave in relation to dividends, change in time, price, implied volatility

• How to evaluate the P&L of various positions at and before expiration

• Synthetics

• How to adjust positions efficiently and when to adjust them

• Practical usage more than classroom theory

• And possibly most important of all, you need to know what you want to achieve with options and what's within your ability. "A man has to know his limitations" - Harry Callahan.

I've never had any use for the Greeks other than delta since I hedge a lot, often having 1/2 a dozen or so different options of the same underlying. I need to know my directional exposure. I'm somewhere in the middle, well beyond Level 1 trading but far short of the pro managing a large option portfolio.

My go to recommendation for those aspiring to learn about options is "Options as a Strategic Investment" by Lawrence G. McMillan. Read it. Then read it again.

When does a beginner "know enough" to begin trading options?

I'd compare this process to learning a foreign language. You can memorize all the words that you want but until you can think the language, you're just a translator, not a speaker. You need to speak the language before you're ready to do more than basic strategies.