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Too many people approach options trading as a fun activity instead of a serious business. This leads to many losing as much money trading options as they would gambling. This makes the entire industry look like speculation at best and a scam at worst.
However, there are many legitimate options traders who earn their living this way, just like stockbrokers. Here are four tips for beginners who want to start trading options for a living.
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Develop an Options Trading Strategy
One of the most common mistakes is entering options contracts blindly. Develop a strategy before you actually enter options contracts. Come up with goals and learn how you can achieve them. Then you can start learning about the industry.
Know what the average stock price or commodity price is before you choose break-even points for your trades. Understand the volatility of the investment before setting your prices, and don’t limit yourself to the options chart.
Learn how the professionals do it before you enter the market yourself. You can’t afford to reinvent the wheel, because you’ll lose money in the process.
Note that you shouldn’t try to copy a complex options trading strategy you picked up from a book if you’re unfamiliar with options trading in general. Options trading doesn’t have to be complicated, and it is best to start with a simple strategy. Have a clear set of rules for deciding what to buy, when to buy, and how long you’ll hold it. Stay away from call options deals until you’re successfully trading options.
Manage Your Risk
Trading options became popular because it was a way for buyers and sellers to manage their risk. You would enter an options contract to buy a commodity like wheat or gold at a certain price. If prices rose, the product buyer had locked in the price or could sell it for a profit. If prices fell, the seller guaranteed a minimum price.
Options contracts have expanded to include everything from stocks to stock market indices. You can buy stock options without buying stocks. This allows you to begin options trading for relatively little money. However, you should manage your risk by starting small.
One way to do this is to practice trading strategies on platforms that let you practice without actually putting money on the line. Another strategy is starting with minimum bids, proving your methods work before you start investing thousands of dollars.
Think Flexibly
Many people starting to trade options think of it as stock trading. For example, they only assume they’ll make money if the price goes up. But options are more flexible, and that’s why you should be, too.
Consider entering options contracts that pay out if the price goes down as well as up. You can even hedge your bets by entering contrary bids. When you hedge your bets, one bet pays out if the price goes up and another pays out if prices go down. You may reduce your profit margin, but you’ll dramatically reduce your losses, too.
Furthermore, you can use options to hedge your risk when you invest in stocks and commodities. For example, you could buy the stock on the expectation that it will go up but invest in an options contract that pays out if the price goes down.
Take Emotion out for More Options Trading Success
Don’t rely on hope or get caught up in the excitement of a “winning” trend. Have your strategy for options trading and follow it. Stop trading and withdraw if you’re losing too much money. Don’t fall for the sunk cost fallacy and keep throwing good money after bad. Don’t buy something just because it is popular or on a hot streak, and always do your research before you buy.
You Can Make a Living Trading Options If You’re Smart About It
Getting into options trading is now more accessible than ever, but it’s also easy to fail if you move too fast. Make sure you follow our tips to avoid the most common mistakes that burn new options traders.
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