Options Trading Advice

Those of you interested in option trading advice are usually either fairly new to the options market, or are experienced traders experiencing some problems with their active trades and therefore are seeking a solution. Should you be in the first category perhaps you are looking for some advice about how to start out options trading, what potential risks are involved and the way to avoid them, ways to trade confidently and still make steady profits. If you find yourself among the second category, there are ways to save or at least, salvage, failing trades, but this discussion must be left for another article.

So what is the most helpful option trading advice for beginners?

The simple response is, to ensure you first find out all there is to know about options trading, especially the principle of time decay, before you decide to risk any of your hard earned funds. Decide what kind of trader you wish to be. Do you want to be a day-trader, a short term trader or a longer term trader who only needs to look at your positions to decide if you will need to adjust them once a day and has around a monthly or longer strategy in place.

The next thing you might want to ask is, what underlying financial instruments do you plan to link your options to? Stocks, commodities or foreign currencies? Whichever one you have chosen, they each have their unique set of characteristics. Stocks can 'gap' overnight. Commodities may become very volatile. Currencies trade around the clock five days per week and are influenced by economic news items.

Remember also, that the shorter timeframes you are going to trade, the higher the stress and if you hold your positions overnight, the more risk of losing trades damaging your account.

The Dangerous Way to Trade Options

In providing option trading advice, we would be remiss if we didn't bring to your attention the point that, like any business, there is a high risk and a low risk method of doing it. If your intended strategy is to merely buy call or put options in an attempt to forecast short term market direction and profit from these movements within a few days, you should appreciate that although this carries a possible high reward profile that makes it appealing, there is also a much greater risk that the price moves against you which means that your losses can quickly be greater than your profits. Many traders who attempt to predict short term market direction have cleaned out whole trading balances.

Perhaps you may believe you have identified an option trading system that works well for this kind of strategy. But if you want some serious option trading advice here, you ought to ask yourself whether you have the personal self discipline to take stop losses as well as stay in trades long enough to realize desired profits. Do you have enough free time to be able to completely focus and act when the need arises? The risky way of trading options often seems attractive to inexperienced traders due to the simplicity of its approach and the confident prospect of earning big profits. But even well seasoned traders find market prediction challenging, so watch out for systems that promise you the moon.

The Low Risk Way

Now this could be the best option trading tip you may ever receive. If you understand the principle of time decay, make sure you learn how to utilize this to your advantage. It's far better to be on the short side of an option contract than the buying side, due to this feature of options. Taking positions with about a month or slightly more to expiry date and being on the selling side of option contracts puts you at a distinct advantage.

But you also want to add to this advantage, the art of adjustments. Despite having the advantage of time decay in your favor, the underlying price movement can come close to breaching your breakeven points prior to option expiry dates and this is where you must know what you can do. If you adjust your positions in the right way at that point, you don't just rescue them from loss but ensure additional profits at the same time.

In connection with the above strategy, you should think about trading indexes as opposed to individual stocks. The reason behind this, is that you prefer a smooth price flow to a volatile one. While a news item may unexpectedly affect the price of an individual stock it will not have much affect on the index to which that stock is related. An index is the aggregate of a selection of stocks like the Dow Jones, the Russell 2000, the OEX, QQQQ or the S&P500 in the USA. Options are available on all these indexes.

Trading double calendar spreads and iron condors on indexes and understanding how to modify your positions at the appropriate time, is one of the best trading approaches I have encountered. My option trading advice to you would be to at least familiarise yourself with these and enable yourself to trade with confidence.

Owen has traded options for many years and writes for Options Trading Mastery, a popular site about the best Option Trading Strategies. Discover a wealth of information about options, including the popular iron condor