Guest Post by Shelley Stevens
Shelley Stevens is the creator of Beyond Pennies, a next gen finance blog. She began trading options six years ago. In this post, she describes how she became an options trader, and lessons that she learned from trading.
Learning to Trade Options
Growing up, I was always interested in the stock market. My first online brokerage account was with Datek, who was bought out by Ameritrade in 2002. I understood how to buy and sell stocks, and studied technical trading techniques, but I knew there was more to learn.
As a single mother living paycheck to paycheck, I decided it was time to learn how to trade options in 2014. I finally had enough starting capital to make it work, but not enough to trade stocks efficiently.
I started watching Tastytrade daily. It was available for free, and it was more engaging than some of the options videos I had watched in the past. It was more real world, less theoretical, and it made sense to me.
Even so, I lost money the first two years. Trading options is not simple – there is a learning curve involved. You have to learn about managing risk, implied volatility, liquidity, and other important concepts that affect the value of options before you can trade consistently. You have to keep yourself from doing reckless things like shorting the market by loading up on VIX calls.
Eventually I made rules for myself. No buying VIX calls, and no shorting Tesla ($TSLA).
The loss turned into a profit in year 3, as I found my groove and started making money. Fast forward to today – trading options is an integral part of my investment toolbox. I still buy and sell stocks when it makes sense, but I also buy and sell options weekly.
I’ve learned so many things in my quest to make money in the market. Here are three lessons that trading options taught me about investing:
Lesson 1: You Don’t Need as much Capital When You Trade Options
As a working single Mom with a small amount of money to invest, I found it easier to make a profit with options vs. stocks. I opened a $2,000 account with TD Ameritrade in 2014.
With $2,000 you can’t buy 100 shares of very many stocks. You can buy a dollar wide vertical on ANY underlying equity stock, as it only takes $100 less the premium you collected to hold the position.
Each vertical or iron condor only used 5% of my account. Although this may seem like a huge percentage for someone with a large account balance, it was far less than the percentage I would have used buying stocks on margin.
Lesson 2: You can Use Most Types of Option Trades in Your IRA
Many people don’t realize that you can trade much more than stocks or mutual funds with an IRA. In fact, many different options strategies can be used in an IRA. One exception is a naked call or put, which usually involves the use of margin to execute. If there’s enough capital in your account to cover your naked call or put, then you can trade that as well.
Other advanced strategies that are off-limits because they involve margin include call front spreads, short combos, or VIX calendar spreads.
If you are holding stock positions of 100 shares or more in your IRA, you might want to learn about covered calls to collect some premium and lower your cost basis. If you are worried about a drop in one of your positions, consider a short call vertical (my pick) or a protective put to hedge your position.
Lesson 3: Greed (sometimes) Leads to Losses
Many of my successful option trades I intentionally closed at 50% profitability. There are trades that I held until expiration in the hopes of making a bigger profit. In some cases, I ended up with a loss when it could have been a winner if I had closed the trade sooner. For that reason, I aim for 50% of profit when I sell (or write) options. For example, if I sell a short put vertical for $1.50, I will buy it back when it is worth around $.75.
I’ve found that managing my winning trades increases my probability of success because it lowers the amount of time my position is at risk. It also increases the turn-around time on my capital. After I close a winning trade, I can then re-deploy my capital to new positions.
Conclusion
Learning how to trade options has been an integral part of my investment education. For those who are intrigued enough to try it out, I recommend opening a brokerage account with real money. It is much easier to learn how to trade when you have real skin in the game. You don’t need a large account to get started. Trade small, trade often, and learn to manage your risk.
Thanks for reading.
Shelley Stevens,
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
