To the Newcomer in Option Trading

For anybody who may be just a starter in option trading and only starting out on your learning journey, we've got some valuable tips here for you. If you accept them, they could mean the difference between sizeable and steady income and wiping out your entire trading capital.

What I'm going to explain to you, is from somebody who has lost his trading bank in the past - and I wish to share with you why this occurs, in the hope you may avoid the same mistakes.

The markets can be a truly powerful ally when you treat them with respect, but if you believe it is possible to outsmart them or pay no attention to what they're telling you, they can financially kill you. It is huge and there's room enough for everyone, but you must be mindful of the risks and be well prepared for them.

So ... here are the main things a beginner in option trading should know.

It's All About You

You will need the right frame of mind to approach trading the markets. Since option trading is a highly leveraged product, the astounding profits you could potentially achieve are offset by considerable losses should you choose to ignore it when things don't work out as anticipated. Things will always go wrong. You'll never get every trade right. It is no different in any other kind of conventional business - some sales are profitable, others are not.

If you're able to see it in this manner, that you are in business (not just a part time hobby) and thus all transactions you undertake comply with an overall business plan, you have a greater chance of being successful. Most businesses fail during the first year of operation, mainly because they fail to plan carefully and understand how they are going to use their financial resources to realize a profit. Your resources are your trading capital. You are investing for profit. If you neglect your business (just ignore your trades with the hope they might fix themselves) it's just like forgetting your customers and hoping they will serve themselves.

Seasoned traders invariably tell the newcomer in option trading, that 90 percent of trading success is all about psychology. The way you handle the decision to get into a trade and how you choose to exit are crucial elements for success. Do you hesitate to "pull the trigger" once you see a great setup, then regret it later when you see the spectacular results you missed out on? Do you find it hard to accept that you have been mistaken about a trade and can't come to grips with taking a minor loss?

You have to be capable of being honest with yourself about these matters. Know who you are and what trading style you're better suited to. Do you see yourself as a day-trader? Can you handle the pressure? Maybe you are better off as 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

You will discover different trading styles you're able to use with option contracts. Some are high risk, high reward, and others low risk but lower returns. Are you looking for 50 percent return on your trading bank each month, or would you be content with just 10 percent? Whatever your answer, 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 per month 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 some books about technical analysis of stock charts and feel persuaded you'll be able to predict the short term direction of stocks. You've heard that with options you can make money whether the stock is rising or falling - call options profit when it's rising and put options increase in value when the stock is falling. Too easy!

But are you aware there are some much more advanced option trading strategies around, which allow you to make a good return from stocks provided that they remain within certain price boundaries until expiry date ... and even if they don't, you can simply adjust your positions to make a profit anyway? The Iron Condor is one such strategy - two credit spreads facing opposite directions with an exercise price gap in between. Beautiful for making a profit within a $10 to $15 trading range over one to two months.

The newcomer in option trading will likely be enthusiastic about future prospects. I recall I was. You're going to be financially free, earning better than your old job. You've seen the light. You can fire your boss and work just one hour each day rather than toiling away for 40 hours per week. No doubt you've heard the "sell". Sounds so good doesn't it.

And indeed, the above can be real . . . IF you take it seriously, build a passion for it, think of it as a business and not a distraction, educate yourself properly and recognize how and when to adapt each strategy to market conditions in a way that minimizes risk and maximises profit.

Many option traders are generating a very healthy living. Others have rapidly eliminated their financial capital so are very disillusioned. Like anything worthwhile, it doesn't come easily - but when it does, the benefits are worth it. If you're 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!