If you are completely new to options trading here are 4 basic tips to get you started:
1. Read, read, read – Before getting started trading options, you need to understand them. I’ve posted some pages going over the basics of options trading, make sure you understand everything on those pages before you even think about opening a trading account. When I started out I knew very little about options trading, I basically read every book I could get my hands on. You need to be able to not only understand what options are and how they work, but you need to learn about other peoples experiences trading options, what works and what doesn’t work. Soon I will be posting a page with my recommended books list, please check that out and start reading! There are just so many great resources out there for you to sink your teeth into, and if you don’t want to spend your hard on dollars on books or courses, then there are so many sources of good free information, take this website for example!
2. Paper Trade – I strongly recommend that you paper trade before investing any of your own money. With options you have the potential to make, but also to lose a lot of money in a short period of time. By tracking your theoretical trades, you will not only get a feel for how options work, but also you will be able to try out many different strategies without risking a bunch of your own money. You can then see which strategies you like and which ones fit your personal risk / reward profile.
3. Open an account – Reading a book on options trading and paper trading is one thing, but you won’t learn as much from this as you will when you have real money on the line. Trust me, I’m speaking from experience here. However, don’t start trading until you have a solid risk management plan in place (see point 4). The one benefit of opening an account before you’re ready to start trading is that you will gain access to a load of research that you wouldn’t otherwise be able to get, or otherwise would have to pay for. For example, I use TD Ameritrade as my broker and they have some great research available from Standard and Poors and well as great charting software.
4. RISK MANAGEMENT!! This is probably the most important thing and I can’t stress it enough. You can lose 100% of your trading capital when trading options, so you need to have sound risk management in place. Start off small and trade low risk strategies, don’t go buying deep out-of-the-money options on your first trade trying to hit one out of the park, and PLEASE do not sell naked options. This is a very, very risky strategy and you can lose more than 100% of your capital! Do not try these risky strategies until you have built up more experience. Stick to simple strategies like writing covered calls, and set a stop loss! Every single highly successful trader sets a stop loss and is able to admit when he was wrong and walk away. For most, this would be when the underlying stock has dropped around 7 or 8%, but make sure you are comfortable with whatever you decide.
Option trading can definitely help your overall investment performance, but it is not without it’s risks. So learn as much as you can, follow the steps outlined above and never risk more than you can afford to lose. Don’t start investing the grocery money in options otherwise you may find yourself divorced pretty quick smart. Best of luck!
