Tips for beginning option traders
Option trading may be daunting for beginning traders, but with the right foundation and a gradual investment of funds, you can expect to see significant returns. Here are a few tips to help you make smart investment decisions.
Do not invest money you cannot afford to lose. Make intelligent decisions about what you can afford to invest. Selling Options is an excellent way to define your risk. You can determine how much risk you want per trade.
You will receive option premium for every option you sold. Do not trade too big, that is do not sell many contracts. Start slowly, trade option spreads to reduce your risk. Once you have realized gains from trades, you can begin to reinvest those gains — which have now become your principal.
Do not trade if you don’t have time to research. Options trading should be approached as a part-time job. If you like to succeed you need to invest time to learn how to trade options and what strategies to apply. Otherwise let your capital be handled by a fund manager.
No quick get rich scheme. Imagine we are playing at a basketball court. I’ll give you $100 only when you score 10 times at a row. Or you can choose to throw the ball 10 times and I’ll give you $10 for each time you score. If you are decent in scoring than you choose to make the 10 smaller shots that reduces the effect of an unlucky bounce can have on the unlucky outcome. So, we choose to enter option strategies with high probability of success and enough option premium.
Trading in small positions has the same benefit on your portfolio. The ideas behind this approach is that if each of your trade uses the same strategic logic you create the same probability of success. It makes sense that you allocate for each trade the same amount of money. Read more — The importance of capital allocation
Diversify your investments. While stocks offer the attraction of seemingly easy money, they are unreliable sources of income. You only have 50% chance of making money. With trading options you can sell options for option premium and choose several strategies with a high probability of profit. If you choose different high POP trades you will consistently make money.
“Know why you are buying a particular security, how much to invest, what your expected return is, and have an exit strategy.” “Have a plan and stick with it,” Beauregard
Make a plan. Irrationality is the enemy of options trading. Before trading options, consider what circumstances would lead you to sell it. When people regard trading as a business a trading plan is necessarily. It is the basis for selling options and making consistent profits. It is so important because the Trading Plan describes what a trader does to set up trades, how to manage existing trades and when to take profits.
Don’t give in to fear. Something many beginning stock and option traders deal with on a daily basis is the fear of losing money invested. While you may see stock values plunge for a company, don’t despair or pull your money out. Most of the trades are being tested and after some days the trade could be profitable.