6Tips for Beginning Options Traders
If you’re thinking about getting into the world of options trading, let me congratulate you!
After all, trading options can be fun and a fantastic way to make money in the market.
Of course, if you’re new to options trading, you’ll these fundamental rules will come in handy when you’re just getting started.
But before we start, there are a few things that both novices and experienced should keep in mind when they’re thinking about options trading.
We’ll get into a few different tips, but the most important thing to keep in mind is your degree of risk management.
Trading options is a great way to control risk, but their leverage can increase the amount of risk you’re taking on as well… depending on the options strategy you use.
One thing you might want to do is to follow the trades of a more experienced trader.
To help you do that, we’ve narrowed down the best option alert service from all the services that are currently available – to help you find the best one.
But with that said, all investments are risky.
Just make sure that you’re actively managing your risk and not putting too much of your portfolio into a trade.
With that out of the way, let’s look at a few tips to help you get started in the world of trading options.
1. Trading Options Offers a Myriad of Trade Possibilities
Unlike traditional trading in the stock market, where you can either go long or short, options trading is more complex.
In fact, by trading options, traders can earn money whether the stock goes up, down or stays within a certain range – all depending on the strategy they use.
Because of the flexibility of options trading, traders who are new to options have a lot more to think about before choosing a strategy and making a decision.
And because of this, you’ll have to be prepared to learn a whole new set of trading strategies and the jargon that goes along with it
2. Options Trading Can Help You Reduce Risk
Investors can reduce their risks by using options.
One way of doing this is to buy what is called a “Put” if you think a stock you own is about to lose some value.
Rather than taking the loss (or selling the stock) you can buy this protective put to make some money if the stock drops below the strike you bought.
It’s almost like buying insurance in case the stock were to lose value.
3. Options Trading Gives You Control
When trading options, you can really dial in your strategy: selecting the exact price you’re willing to buy a stock at, deciding what price a stock will be at by a certain time and so on.
It can be a great way to take advantage of certain market moving events that you feel will happen at a certain time, while only risking a fraction of the money required if you were to buy the same amount of shares.
4. Understand the “Break-Even Points.”
There is a break-even point for every option you purchase or sell.
Knowing your break-evens will help you avoid making one of the most common options trading mistakes: ignoring the strategy you laid out before you initiated the trade.
The break-even point is the point at which a stock must hit (high or low) before the option position is profitable.
When calculating your break-even points, you have to take into account both the cost of owning the option and the fees payable on both the buy and sell sides of the trade.
If you don’t plan ahead in this regard, you’re really playing with fire.
5. Do your homework
Don’t just look at the chart.
Sure, you can get an idea of how the option behaves, but it doesn’t really give you everything you need in order to trade the underlying asset.
And any time you’re about to buy or sell an option, it’s crucial that you have a great understanding of it.
You need to study both the stock and the options chart in order to know exactly how the underlying asset is likely to move.
6. Trade with the Trend
The golden rule for all traders (regardless of whether they’re trading stocks, options, bonds, crypto or forex) is: “The trend is your friend.”
Don’t try to forecast where a sinking stock will plateau or a rising stock will level out when evaluating the worth of underlying stocks.
If you’re not trading in a way that assumes that current trends will continue, you’re really just gambling.
At the end of the day, it’s impossible to be correct 100 percent of the time in trading.
But if you practice enough – and keep the above points in mind – you’ll be correct more often than not, and will put yourself in a position to make money.