Options Primer

Options Trading Guide for Beginners

Logical vs. Emotional Trading

Successfully trading options requires you to think with logic, not emotions. Before making any trade, you need to understand your position thoroughly.

What is your maximum potential profit and loss? How likely are you to profit? All of this information is critical to your success. Traders who rely on luck belong in the casino, not the options market.

Although beginners hear this advice all the time, they still choose to ignore it until they lose a lot of money. For example, many investors start trading options in hopes of making huge profits from leverage – using strategies with low costs and high potential returns.

A combination of low risk and high returns directly appeals to your emotions (i.e., excitement). Who wouldn’t get excited about earning so much money that they could pay off all debts and retire early?

Unfortunately, highly leveraged options are cheap because they have a low chance of profit. Instead of becoming wealthy from one trade as you’d hoped, you might lose your entire investment over time.

There are many other ways to mess up option trades, from choosing the wrong strategy to underestimating risk. Don’t fall into the trap of thinking that you’re special, or you’ll consistently lose money and not even know why.

Options Trading Mindset

Don’t forget that there are two sides to options trading – a buyer and a seller. Anyone willing to fulfill the other end of your trade has a reason to do so. To win trades consistently, you must do your homework to outsmart and ‘outdiscipline’ the opposing trader.

The market, probability, and other traders don’t care whether you succeed or not. If you don’t do your research and want to hand over your life savings on a silver platter to them, they’re more than happy to accept.

Although you can’t pick your opponents directly, you can avoid making the same low-success trades (gambles) that beginners usually make. You might even profit from taking the other side of those gambles.

As you go through this guide, you’ll develop the ability to discern when and why specific strategies are more likely to profit. You’ll also learn how to readjust your risk when trades move out of your favor.

How to Start Trading Options Successfully

Knowing the fundamentals is a crucial step in successful options trading. A sensible trader should understand their trades just as competent athletes know their sport.

But unlike sports, choosing the wrong options strategy has higher stakes than having a bad game. After all, a single trade can wipe out your life savings and end your career. It doesn’t help that the best way to learn is to get practical experience, which involves some risk.

However, you can negate risk altogether by trading options on a paper-trading account or reduce it with low-risk strategies. Until you create a consistently profitable trading plan, only invest money you can afford to lose.

Limitless Tip: I trade with cash I’ve earned to make sure I take options seriously. Risk motivates me to study harder and learn faster, but it may not have the same effect for you. You’re more than welcome to learn from my mistakes, though!

Consulting Other Sources

When possible, you should learn from the mistakes other people have made. Experience may be a good teacher, but going bankrupt is a steep price to pay for it.

That’s not to say you should let someone choose your trades. Anyone who promises you’ll profit from their stock or option picks is likely trying to sell you something. If any trader could make such a guarantee, would they even need to take your money?

Since nobody knows your financial situation like you and your investment advisor, only the two of you can make the calls. How much do you have to invest? What are your risk tolerance and investment timeline? These factors may also determine the strategy, position, size, and frequency of your trades.

Key Points

Options are high risk, high reward. Take your time to learn, and don’t rush!
Learn how options generate profits and losses instead of relying on luck/chance.
There’s a reason someone will take the other side of your options trade. Being arrogant is the fastest way to get humbled by the market.
Manage risk with paper-trading or low-risk strategies.