An Option Review: Option trading is a type of trading that describes the buying and selling of rights to buy or sell an underlying security at a specific price on or before a specified date. Options are financial derivatives, which derive their value from the performance of an asset rather than its equity price. Option contracts may be traded on exchanges such as the CBOE and the Chicago Mercantile Exchange (CME), or over-the-counter OTC.
In this article, I’ll share 5 things I learned when executing my first option trade. I hope you find them useful; it might even save you some money! Here we go…
#1 – DON’T WAIT FOR A BREAK OUT TO BUY OPTIONS##
Actually, don’t wait for ANYTHING.
The Options market is a pretty big one and it has been around for decades; there are many strategies that can make use of the power of options… but Options trading also requires money to trade; thus, as with most investment strategies you must first save up some cash (or get a loan).
While waiting for that break-out your investments will grow slowly (or not at all) in a savings account. I’m not saying Option trading is better than doing nothing, but Options trading allows you to watch stocks more closely while still keeping a decent amount of option premiums available – even if you’re just starting out. The only problem with Option trading though is that things happen quickly; Options trading can be a little complex if you’re just starting out.
#2 – WHATEVER YOU DO, DON’T GET FASCINATED BY INFORMATION
It’s too easy to litter your browser history with Option strategies. Even when I was just starting out I kept hearing about only one Option strategy: the Diagonal spread. Well, besides it being an Option strategy that pays well in most market conditions I found it interesting for two other reasons:
- It is relatively simple to put on and
- It has got a very famous author advocating its use: Mark Douglas (aka “The Option Trader” at Tradeking). You might as well give him a follow on Twitter. Click here to learn more about Option trading strategies.
Sometimes I spend a little too much time looking at Option strategies on Optionstrading.org and other Option trading resources, but I try to limit this kind of behavior by asking myself: What’s the point? Do you really want to know how to put on a Bull Call Spread (or whatever) when you are just starting out? Answer that for yourself.
#3 – GET A SEMI-SOLID FOUNDATION FIRST BY READING UP ON THE BASICS
It could be that your first Option trade will have disastrous consequences with losses so high they might force you to give up Option trading forever! The best thing in Options trading is staying away from those negative emotions until it hurts so much you can’t take it anymore, but Options trading is a game where emotions can get the best of us.
- Going over your own gut feeling about risk
- Do some more reading
- Maybe even attend an Option trade class. Start from here: Option Strategies: A Mentorship Program
- Make sure you’ve got at least ₹50000 set aside for your Option trading account.
#4 – DON’T OVER RESPECT THE KING OF OPTIONS TRADING: VOLATILITY
Option trading can be a valid way to earn income when you don’t have the possibility of picking stocks based on their fundamentals, but Option trading is not without risk. Option premiums are affected by volatility (among others).
Options traders usually use Volatility as a kind of weapon, meaning they would rather buy Option contracts that get more expensive if the market gets turbulent. That’s fine and dandy but Option premium prices are affected by more than just volatility; in fact, volatility isn’t even the most important factor (in my opinion).
- Read this article for more about Option basics and definitions: How to trade Options?
#5 – STOP OPTIONS TRADING IF IT BECOMES A HABIT
Option trading is gambling. Of course, Option traders don’t want to believe that Options trading is a form of gambling; Option traders tend to think Option trading is more intelligent and less risky than just about anything else out there (save for maybe writing options). But really Option Trading is as much a gamble as the next thing you might consider an investment (I’m not saying it’s not an investment because Option premiums are often used as a kind of leverage ).
If you find yourself feeling nauseous with anxiety when you watch your Options trades all expire worthless then ask yourself: What would make me feel better? Options trading or starting a blog? Options trading can be good if you keep it in bounds and respect the risks involved. Options trading is gambling, but Option traders don’t like being reminded of that from time to time.
Hope this Options trading article helps! It’s a topic I’ve already covered in another Option Trading post. Check out my Options trading blog for more information about Options Trading.
- What Wikipedia Can’t Tell You About Trade Options for a Living
- Options trading is risky, don’t lose your shirt!
One thing I haven’t tried yet is virtual stock trades or virtual stock market games. Maybe someday when I have nothing else to do other than play with myself!
If you are looking for a successful Option trader follow the link below to see who they might be on Twitter:
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Options Strategies – A Mentorship Program
On the 1st of September, We have launched a new mentorship program for Option strategies, in which we’ll discuss how can we deploy these strategies? What rules we should follow before taking a trade? and what should be our adjustments if the script is moving against your direction?
DISCLAIMER: – we are not a SEBI research analyst. Views posted here only for educational purposes. There is no liability whatsoever for any loss arising from the use of this product or its contents. This product is not a recommendation to buy or sell, but rather a guideline to interpreting specified analysis methods. This information should only be used by investors and traders who are aware of the risk inherent in securities trading.