Most beginner options traders feel overwhelmed and uneducated about options trading. Some are confused about how to get started, and some might not know if options trading is even right for them in the first place.
If you’re facing the same issue, don’t worry …
You’re not alone!
It’s easy to feel lost when you do not have a specific plan in mind.
Many beginners just want to jump in and get some experience trading options without the proper education. Of course, that does not work because most of the time their trades are hit and miss. Why is that?
Well, novice options traders can easily make elementary mistakes when executing an options strategy but fail to realise it.
For example, they may be planning to execute a diagonal spread to generate some short-term income for their portfolio but they buy options that are not deep enough in-the-money.
This may then lead to a loss even though they got the direction right for the underlying stock.
A trader’s journey in options trading begins with the right mindset … and just as importantly, a solid foundation in options.
To trade options successfully, you need to understand the building blocks, and you need to have a plan so that you can get started on the right track.
So let’s take a look at the five steps towards launching your options trading journey with confidence.
Most traders go into options because – ironically – they’re no good at stock picking. So they end up compounding their disadvantage with options.
At WiseTraders we emphasize stocks first, and then you can accelerate your progress using options.
Before you start trading options, you also need to learn the basics and build a solid base of options knowledge. This knowledge will help you minimize the mistakes that others routinely make.
For the more adventurous, there are many options strategies beyond just buying calls and puts.
Step 2: Identify your goals
If you’re just getting started with options trading, it may be helpful to think of what you hope to accomplish with options.
In a sense, this is the “Why” of your trading.
The “What” of your trading refers to the specific strategies that you choose.
The “When” refers to the timing of your trades.
Finally, the “How” refers to the tools and features you use to execute your trades.
By identifying your goals, you can better answer these other questions (ie. what, when and how).
There are many types of options strategies, each with different characteristics. Some options strategies thrive in a market that’s moving fast in one direction, while others work better when the market is moving sideways or even going nowhere.
Having a goal helps narrow down the number of options strategies to choose from. There is no “right” or “wrong” here, just as there is no option strategy that is better than another.
Once you have become a good stock picker, the next question is what type of options strategy best fits the setup, your personality, your trading goals, your experience level, your trading style and risk tolerance?
Options trading can be as simple or as complicated as you want it to be.
We like to keep it simple … because using our techniques we’re good stock pickers! The fusion of the two is the ultimate skillset.
If you want to generate some income from stocks that you already own, then a covered call strategy may work well for you. However, if you don’t own any stocks, then buying or selling call or put options is another way to profit from rising or falling stock prices.
A trading plan is similar to a battle plan, but with one crucial difference.
A famous boxer once commented that a plan was all very well until you got punched in the face!
That’s not the same with trading, if you do it the right way.
Trading the correct way you can stick to your plan. A robust trading plan means you are controlling your risk every time.
Trading without a proper trading plan is gambling. It’s not trading.
And nearly every trader who doesn’t use a trading plan will blow up their account.
With options, your trading plan will vary based on what strategy you’re deploying.
For example, simply buying a call (bullish) will have a different objective, time horizon, and structure to, say, buying a straddle (direction neutral requiring volatility).
With a long call, the time horizon can be anything from days to months, while establishing protection against time decay, typically using deep in-the-money options.
With a straddle you buy at-the-money options with a specific time horizon required for a move in the underlying stock to occur well before expiration.
Virtual trading is widely regarded as an essential step in a trader’s career. It allows you to try out strategies and learn how to trade without risking your actual capital.
By learning about option strategies in a simulated environment, you can test out new trades and learn what works for you. Testing these strategies before entering a live market is highly recommended since it will keep you from making costly mistakes.
Just like any other form of investing or trading, it takes time to become familiar with the markets, options strategies, and the platform you are using. Getting acquainted with all of these things ahead of time will ensure that you have a successful start when you begin live.
With the stock market growing in popularity, options trading has become an attractive way for traders to take advantage of these conditions, provided you start simple and know what you’re doing.