For the Newcomer in Option Trading

For anyone who might be only a beginner in option trading and just beginning your education, we have some important tips for you. If you accept them, they could mean the difference between sizeable and continuous profits and cleaning out your whole trading bank.

What I'm about to explain to you, is from someone who has lost his hard earned money in the past - and I want to share with you the reasons why such a thing happens, hoping you may avoid the same mistakes.

The financial markets are a truly powerful ally when you treat them with respect, but when you believe it is possible to outsmart them or disregard what they're telling you, they can financially ruin you. It is massive and there's room enough for everyone, but you must be aware of the risks and be prepared for them.

So ... let us discuss the most crucial things a beginner in option trading needs to know.

It's All About You

You will need the right mental attitude to approach trading the markets. Since option trading is a highly leveraged instrument, the astounding profits you are able to realize are offset by substantial losses if you choose to ignore it when things go bad. Things will invariably go wrong. You will never get every trade correct. It's no different in any other kind of traditional business - some transactions are profitable, others are not.

If you can see it this way, that you're in a business (not a part time hobby) and as a consequence all transactions you undertake are in accordance with an overall business plan, you have a greater probability of being successful. Most businesses don't succeed during the first year of operation, mainly because they don't plan carefully and know how they're going to use their financial resources to realize a profit. Your resources are your trading capital. You're buying and selling to make money. If you neglect your business (just ignore your trades in the hope they might fix themselves) it is like forgetting your customers and hoping they will serve themselves.

Experienced traders invariably say to the beginner in option trading, that 90 percent of trading success is about psychology. How well you handle the decision to get into a trade and the way you choose to get out are vital components for success. Would you hesitate to "pull the trigger" when you notice a positive setup, then be sorry later as you see the outstanding results you missed out on? Do you find it difficult to accept that you have been mistaken about a trade and cannot come to grips with accepting a minimal loss?

You need to be able to be honest with yourself about these things. Know who you are and what trading style you're best suited to. Do you see yourself as a day-trader? Are you able to handle the pressure? Maybe you are better off being a short term trader? Or when your every day life is otherwise demanding, perhaps a longer term investment strategy might better fit your style?

Different Strokes for Different Folks

There are different trading styles you can utilize with option contracts. Some are high risk, high reward, and others low risk but lower returns. Do you need 50 percent profit on your trading capital each month, or will you be content with just 10 percent? Whatever your response, how does that fit with the amount of capital you have to trade with and is that able to satisfy your financial objectives?

$100,000 on low risk positions bringing an average 5 to 15 percent monthly is much easier and more manageable than $10,000 on high risk trades after a minimum 50 percent every month.

Educate Yourself

Maybe when just beginning in option trading, you've read a few books about technical analysis of stock charts and feel confident you are able to anticipate the short term direction of stocks. You've heard that utilizing options you can make money whether the underlying is rising or falling - call options profit when it's rising and put options increase in value when the underlying is falling. Too easy!

But are you aware there are some much more advanced option trading strategies available, which enable you to make a good income from stocks so long as they stay within certain price boundaries until expiry date ... and even if they don't, you can simply adjust your positions to turn a losing position into a profit anyway? The Iron Condor is just one such strategy - two credit spreads facing opposite directions with a price gap in between. Terrific for producing a nice gain within a $10 to $15 trading range over one to two months.

The beginner in option trading will likely be excited about future prospects. I recall I was. You will be financially free, earning as good as your old job. You've seen the light. You can fire your boss and work just one hour daily rather than slaving away for 40 hours a week. You've probably heard the "sell". Sounds so great doesn't it.

And indeed, all the above can be real . . . IF you take it seriously, develop a passion for it, consider it a business rather than a distraction, educate yourself properly and recognize how and when to adapt each strategy to market conditions in a manner that minimizes risk and maximises profit.

Plenty of option traders are generating a very healthy living. Others have rapidly wiped out their available funds so are very disillusioned. Like anything worthwhile, it doesn't come easily - but once it does, the rewards are worth it. If you are a beginner in option trading, jump on board for the interesting journey ahead.

Owen has traded options for many years and is writes for "Options Trading Mastery" - a popular educational site about stock option trading. There you'll discover the best Option Trading Strategies and empower yourself for trading success!