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For any Beginner in Option Trading
For anybody who might be just a starter in option trading and only starting out on your learning experience, we’ve got some serious tips for you. If you take heed, they might mean the difference between substantial and steady profits and wiping out your whole trading capital.
What I’m going to tell you, is from a person who has lost his hard earned money in the past – and I hope to share with you why this occurs, hoping you can avoid the same pitfalls. The financial markets can be a very rewarding friend when you treat them with respect, but when you believe it is possible to outsmart them or ignore what they’re telling you, they can financially ruin you. They are huge and there’s room enough for all, but you must be conscious of the risks and be well prepared for them. So … let’s consider the main things a beginner in option trading needs to know.It’s All About You You need to have the right state of mind to approach trading the markets. Since option trading is a highly leveraged instrument, the astounding profits you can achieve are matched by significant losses if you choose to disregard it when things go bad. Things will always go wrong. You’ll never get every trade correct. It’s no different in any other form of conventional business – some sales are profitable, others are not. If you’re able to see it this way, that you are in a business (not a part time hobby) and therefore all transactions you undertake comply with an overall strategic plan, you will have a far better chance of succeeding. Most businesses don’t succeed during the first year of operation, primarily because they neglect to plan carefully and understand how they’re going to use their resources to realize a profit. Your resources are your trading bank. You are buying and selling for profit. When you neglect your business (just ignore your trades in the hope they might fix themselves) it is like disregarding your customers and expecting they are going to serve themselves. Experienced traders invariably tell the newcomer in option trading, that 90 percent of trading success is about psychology. How you handle the decision to get into a trade and the way you choose to exit are crucial elements for success. Do you hesitate to “pull the trigger” once you see a great setup, then regret it later because you see the outstanding outcomes you missed out on? Do you find it difficult to accept that you have been mistaken about a trade and cannot come to grips with taking a minimal loss? You have to be capable of being honest with yourself about these things. Know who you are and what trading style you’re best suited to. Are you a day-trader? Can you handle the pressure? Perhaps you are better off being a short term trader? Or when your life is otherwise busy, perhaps a longer term investment strategy might better fit your style?Different Strokes for Different Folks There are different trading styles you can use with option contracts. Some are high risk, high reward, and some low risk but lower returns. Are you looking for 50 percent return on your trading capital each month, or will you be content with just 10 percent? Whatever your answer, 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 after a minimum 50 percent each month.Educate Yourself Maybe when just beginning in option trading, you’ve read some books about technical analysis of stock charts and feel assured you are able to predict the short term direction of stocks. You’ve heard that utilizing options you can make money whether the stock is rising or falling – call options profit when it’s rising and put options increase in value when the stock is falling. Too easy! But are you aware there are some much more sophisticated option trading strategies to choose from, which allow you to generate a good income from stocks so long as they stay within certain price boundaries until expiry date … and 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 price difference in between. Excellent for making a nice gain within a $10 to $15 trading range over one to two months. The new investor in option trading is usually excited about future possibilities. I recall I was. You will be financially free, earning as good as your old job. You’ve seen the light. You can sack your employer and work just one hour each day instead of slaving away for 40 hours a week. No doubt you’ve heard the “sell”. Sounds so great doesn’t it. And indeed, all the above can be real . . . IF you take it seriously, develop a passion for it, consider it a business and not a distraction, educate yourself properly and understand how and when to adapt each strategy to market conditions in a manner that minimizes risk and maximises profit. Plenty of option traders are earning a very good living. Others have rapidly eliminated their available funds and are very disillusioned. Like anything worthwhile, it doesn’t come easily – but once it does, the benefits are worth it. If you are a beginner in option trading, you have an exciting journey ahead.
Owen has traded options for many years and is writes for “Options Trading Mastery” – a popular educational site about
stock option trading
. There you’ll discover the best
Option Trading Strategies
and empower yourself for trading success!