To the Novice in Option Trading
For anybody who may be only a beginner in option trading and just beginning your learning journey, we have a few valuable tips here for you. If you take them seriously, they might mean the difference between significant and consistent income and wiping out your entire trading bank.
What I'm going to explain to you, is from someone who has lost his hard earned money in days gone by - and I would like to share with you reasons why such things happen, in the hope you can avoid the same pitfalls.
The financial markets can be a truly rewarding friend if you treat them with respect, but when you believe you can outsmart them or pay no attention to what they are telling you, they can financially kill you. They are massive and there is more than enough room for everyone, nevertheless, you must be aware of the risks and be well prepared for them.
So ... let us discuss the main things a newcomer to option trading should know.
It's All About You
You need to have the right frame of mind to tackle trading the markets. Since option trading is a heavily leveraged instrument, the astounding profits you are able to realize are offset by substantial losses should you choose to disregard it when things go wrong. Things will always go wrong. You'll never get every trade correct. It's no different in any other type of traditional business - some transactions are profitable, others are not.
When you can look at it this way, that you are in a business (not just a part time hobby) and thus all transactions you undertake are in accordance with an overall business plan, there is a far better chance of succeeding. Most businesses fail within the first year of operation, mainly because they don't plan carefully and know how they are going to use their financial resources to produce a profit. Your resources are your trading capital. You are buying and selling to make money. If you neglect your business (forget about your trades with the hope they might fix themselves) it's just like forgetting your customers and hoping they will serve themselves.
Experienced traders always say to the beginner in option trading, that 90 percent of trading success is all about psychology. The way you handle the decision to get into a trade and how you choose to get out are critical components for success. Do you hesitate to "pull the trigger" when you see a positive setup, then regret it later when you see the spectacular results you missed out on? Do you find it difficult to accept that you have been wrong about a trade and cannot come to grips with taking a small loss?
You have to be capable of being honest with yourself about these things. Know yourself and what trading style you're better suited to. Are you a day-trader? Are you able to cope with the pressure? Maybe you are better off being a short term trader? Or if your life is otherwise busy, perhaps a longer term investment strategy might better suit your style?
Different Strokes for Different Folks
There are different trading styles you can utilize with option contracts. Some are high risk, high reward, and some low risk but lower returns. Do you need 50 percent yield on your trading bank each month, or would you be content with just 10 percent? Whatever your response, how does that fit with the amount of capital you have to trade with and will that be enough for you to live on?
$100,000 on low risk positions bringing an average 5 to 15 percent per month is much easier and more manageable than $10,000 on high risk trades looking for a minimum 50 percent per month.
Maybe when getting started in option trading, you've read some books about technical analysis of stock charts and feel persuaded you'll be able to anticipate the short term direction of stocks. You've heard that with options you can make money whether the underlying is rising or falling - call options profit when it's rising and put options increase in value when the underlying is falling. Too easy!
But did you realize there are some much more advanced option trading strategies around, which allow you to make a good income from stocks on condition that they stay within certain price boundaries until expiration date ... but even if they don't, you can simply adjust your positions to make a profit anyway? The Iron Condor is just one such strategy - two credit spreads facing opposite directions with a strike price difference in between. Beautiful for producing a profit within a $10 to $15 trading range over one to two months.
The learner in option trading is usually excited about future possibilities. I remember I was. You're going to be financially free, earning better than your old job. You've seen the light. You can sack your employer and work just one hour daily rather than toiling away for 40 hours a week. No doubt you've heard the "sell". Sounds so good doesn't it.
And indeed, the above can be true . . . IF you take it seriously, develop a passion for it, think of it as a business rather than a distraction, educate yourself properly and understand how and when to adapt each strategy to market conditions in a way that minimizes risk and maximises profit.
Many option traders are earning a very healthy living. Others have rapidly eliminated their available funds so are very disillusioned. Like anything worthwhile, it doesn't come easily - but once it does, the rewards are worth it. If you are a beginner in option trading, you have an interesting journey ahead.
Article Tags: Option Trading
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ABOUT THE AUTHOR
Owen has traded options for many years and writes for Options-Trading-Mastery.com - a popular site about profitable Option Trading Strategies.