“Great traders have passion, confidence, an edge and a game plan. They are prepared. They keep their system simple.” – Gavin McMaster
I have been options trading for several years, and while my results have been mostly up and sometimes down, what is noteworthy is that I have survived many different market cycles – bullish and bearish, recessions and depressions, optimistic and always growing, and everything in between. That is no easy feat, which is why I’m starting this series on options trading for beginners.
Here’s the deal: Surviving in this jungle called “the market” is very difficult without a safety net. Success is as much about the bottom line results as it is about longevity. I always tell my coaching clients and chat room members that I hope they are still in the game in five years, not necessarily killing it but making a good living (if trading full time) while gaining wisdom and experience along the way.
You need to consistently post positive profit/loss figures (p/l) to stay in the game. Because trading is not a game of perfect, you are constantly entering the “sea of the unknown,” aka, the future. And this is where it gets tricky. To avoid a disastrous outcome that puts you on the sidelines temporarily (or even permanently), you need a game plan that includes preparation, strategy, risk management, discipline and the ability to keep your head in the game, no matter what happens. We’ll cover some of these tactics here and others in future articles.
Options Trading for Beginners: How To Get Started
Understand the basics
Before you get involved with trading options you must have a good handle on the basics. Options are not stocks; they are a derivative of the stock that gives you the option to purchase the underlying asset (the stock). Options are either calls (bullish) or puts (bearish), and you can be a buyer or seller of both.
Unlike stock trading, options trading offers you a great deal of leverage due to the time constraints placed on them. Options have weekly, monthly or quarterly expiration dates. This added element is referred to as time decay. It works against the buyer but benefits the seller. As an options trader, you MUST be aware of the time constraints and how it may affect a decision. Timing a purchase is absolutely crucial to success.
Commit to continual education
Absorb as much information as possible from books, online publications and articles that discuss different strategies for options traders. I have written scores of blogs that range from the most basic to advance levels, and over the past five years we have recorded hundreds of webinars that are a great learning resources (and are free!). Learn as much as you can before you start, but remember that there’s a reason people say, “Experience is the best teacher.” That is very true for options trading.
Know your financial limits
Don’t bet more than you can afford to lose. I tell every level of options trader to expect some losses among winners. You cannot get ahead if your financial situation collapses with one or two losses. This is where many traders fail; they get wiped out because they’re not disciplined. They believe they’re smarter than the markets, and they get eliminated from the game.
Put a sound risk management rule in place before you start trading: Only risk a small amount per trade. For most traders, it should be no more than 1-2% of your total capital.
You also need to understand when to say “uncle” and take a loss rather than watch a trade sink to zero. Accept the fact you will not win all the time. Remember, trading is not about being perfect.
In my next article on options trading for beginners, I’ll talk about putting together a game plan and feedback mechanisms, along with some other preparation techniques.
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