Options Trading Advice
Those looking for option trading advice are usually either fairly new to the options market, or are experienced traders having some difficulty with their current trades and are hoping for an answer. So what is the best option trading advice for beginners?
So what is the best option trading advice for beginners?
The simple response is, to make certain you first understand all there is to know about options trading, especially the concept of time decay, before you decide to risk any of your hard earned money. Decide what kind of trader you intend to be. Do you want to be a day-trader, a short term trader or a longer term trader who only needs to check your positions to see if you will need to adjust them once a day and it has at least a monthly or greater strategy in place.
The next thing you ought to ask is, what underlying financial instruments do you wish to link your options to? Stocks, commodities or foreign exchange? Whichever one you decide on, each of them have their own set of characteristics. Stocks can 'gap' overnight. Commodities can become very volatile. Currencies trade around the clock five days per week and are also affected by economic news items.
Remember also, that the shorter timeframes you want to trade, the greater the stress and if you hold your positions overnight, the higher risk of losing trades cleaning out your account.
The Dangerous Approach to Trade Options
In sharing option trading advice, we would be remiss if we didn't bring to your attention the fact that, like any business, there's a high risk and also a safe way to do it. If your intended strategy is to simply buy call or put options in an endeavor to anticipate short term market direction and profit from these movements within a few days, you should understand that although this carries a potential high reward profile making it attractive, there is also a much greater risk that the price will go against you so that your losses can quickly outweigh your profits. Many traders who try to predict short term market direction have cleaned out entire trading accounts.
You might believe you have found an option trading system that works for this kind of strategy. But if you would like some serious option trading advice here, you must ask yourself whether you have the emotional self discipline to accept stop losses and also remain in trades long enough to realize targeted profits. Do you have enough free time to be able to concentrate and take action when the need arises? The risky way of trading options often seems attractive to new traders because of the simplicity of its approach and the confident prospect of making significant profits. But even well seasoned traders find market prediction difficult, so watch out for systems promising you the moon.
The Low Risk Way
Now here is the best option trading advice you might ever be given. If you understand the concept of time decay, make sure you discover ways to utilize this to your advantage. It is more advantageous to be on the selling side of an option contract as opposed to buying side, due to this characteristic of options. Taking positions with about a month or slightly more to expiry date and being on the selling side of option contracts puts you at a distinct advantage.
But you also want to add to this advantage, the art of adjustments. Even with the advantage of time decay working for you, the underlying price movement can come close to breaking through your breakeven points before option expiry dates and this is where you must know what you can do. If you adjust your positions in the right way when this happens, you not only rescue them from loss but ensure additional profits at the same time.
In connection with the above strategy, you should consider trading indexes as an alternative to individual stocks. The reason for this, is that you prefer a smooth price flow to a volatile one. While a news item may unexpectedly impact the price of a particular stock it will not have much affect on the index to which that stock is related. An index is the aggregate of a group of stocks like the Dow Jones, the Russell 2000, the OEX, QQQQ or the S&P500 in the USA. Options are available on all these indexes.
Trading double calendar spreads and iron condors on indexes and understanding how to modify your positions when necessary, is one of the best trading techniques I have found. My option trading advice for you would be to at least familiarise yourself with these and enable yourself to trade with confidence.
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ABOUT THE AUTHOR
Owen has traded options for many years and is writes for "Options-Trading-Mastery.com" - a popular site which reviews the best option trading systems and provides comprehensive information about option trading in general.