Learn To Trade Options, Where to Begin
As a novice trader you probably aware of what an option is and how to use it. But simply exercising your right to buy or sell stocks in not your only choice. The contract also gives you the ability to trade stock options. Trading gets a lot of press lately and it’s hard to know what to do and who you can trust. One thing to understand is that it is not a get rich quick scheme where you should just immediately buy the options and then trade the option. Yes, you can make a lot of money when you trade stock options, but many other people also lose a lot of money too. There is a sequence of things you should do and make sure you have mastered before you dive into the world of trading options.
You should be able to pick a good stock first. Any good option trader absolutely has to be able to analyze the stock market and pick a winning stock. Stock options are a bit more complicated in that in order to successfully trade options you have to be able to accurately predict what a particular stock is going to do. Since options are just an extension of normal stocks, you should practice with the normal stock first.
Reading about analyzing the technical and fundamental aspects of the stock market is also important. Go to the library and read as much as you can. There is a lot to learn in order to successfully learn to trade options. Scour the Internet for as much information as you can and learn how other people do it. If you simply jump in and start trading options you may find that you’ve overlooked the basics of stock analysis and take a loss when you finally trade the option. There is lots of great information online and a few books specifically geared toward teaching you to learn to trade options. Learn from others success and know the ins and outs of stock options as well as you can.
Typically only about 5% of traders will succeed with stock options, so don’t expect this to be an easy thing. If you are thinking that you can pay a few hundred bucks and spend a day in a seminar and know it all, you would be wrong. You will spend long hours not only researching the different stock options but watching and analyzing the market so that you know when is the best time to buy. When you are first beginning you should use stock options as an extension of your stock portfolio. This gives you the ability to make a few mistakes while you still have your portfolio intact and you’re not completely out in the cold. Use the rest of your portfolio to offset some of those mistakes and generate some income.
You should also keep your strategy simple at first. You will undoubtedly hear of strategies like delta neutral, back-spread, butterflies, calendars, etc. Be aware these are Market Maker strategies. They will not work on a retail basis and attempting to implement them will only lead to financial loss. Keep a simple strategy; if a stock has been rising and all forecasts suggest that it will continue to rise…buy a stock option. Then you can trade it once the stock rises again and you’ve made your profit. Also know that it’s important to have proper amounts of capital. If you want to trade stock options seriously then you should have at least $10,000 in capital. And this capital should be no more than 10% of your overall portfolio. Options are complex and you need to make sure you have enough financial cushion if you don’t do well at first.
Finally, have realistic expectations. Most people would consider themselves successful at trading options if they make a 20% profit. And expect that you will lose money. Even people who have been trading options for 20 years that still lose money on trades. It is simply part of the process and you will never have a 100% success rate. It is an easy business to start but it’s a horribly difficult one to grow.