As a beginner options trader, learning how to trade options can be an exciting experience, but it can also be extremely frustrating and very costly. There are some common mistakes that lead to many beginner options traders to lose large sums of money in a very short period of time. Here’s a brief overview of options trading that cuts through the jargon and gets right to the core of this versatile way to invest.
Step by Step Guide for Beginners on Options Trading
1. The first step is to trade with a commission friendly brokerage firm because trading options actively can be extremely costly, especially when paying high commission rates and ticket charges.
2. Now, the second tip is to pay attention to risk. So as a new options trader, it’s very easy to fall into the trap of just focusing on how much money you can make, but ignoring how much money you can lose with any particular strategy. So just keep in mind that in the long run, not making as much money is always better than losing a lot of money.
3. Now, our third option trading trip is to stick to well-known stocks, so a lot of the time new traders will look for obscure companies or they’ll trade penny stocks. They’re going to have a higher probability of staying around longer and they’re just going to be less surprised overall. So just stick to well-known companies and ETFs that have lots of trading volume and very liquid options.
4. Now, our fourth option is trading tips for a beginner is to avoid complex products. So if you remember, XIV XIV was a complex volatility product that gained a lot of popularity among retail investors before losing 95 percent of its value overnight. So don’t trade something unless you’re absolutely sure you understand how it works. Now, if you want to be safe, just avoid products with 2x 3x short leveraged inverse or ultra in their names or descriptions.
5. Our fifth options trading tip is going to be to stick with limited risk strategies. So the reward potential of high-risk strategies like short straddles and short strangles can be very appealing at first. But they can also leave you broke or in debt in one losing trade.
A lot of people don’t like to think about psychology because they don’t think it matters. But the truth is that trading is stressful and being involved in the markets, in general, is stressful. To learn how you react to profits and losses over time and use the strategies that are easiest on you psychologically. Options Trading for Beginners
Develop a quantifiable strategy or plan
A training plan should include the stock or product to be traded, and it should include a specific option strategy with a quantifiable setup. Options traders use the Greek Alphabet to reference how option prices are expected to change in the market, which is critical to success when trading options.
The most common ones referenced are Delta, Gamma, and Theta. Although these handy Greek references can help explain the various factors driving movement in option pricing and can collectively indicate how the marketplace expects an option’s price to change, the values are theoretical in nature.
Now, for example, that could mean selling thirty Delta put in buying the sixteen Delta put to create a put spread with thirty days to expiration. The next things you need are consistent trade sizing and quantifiable entry, exit, and adjustment triggers. So you know exactly what you’re doing with your trade at all times.
Overview of Options Trading for Beginners
Options are contracts that give the owner the right to buy or sell an asset at a fixed price for a specific period of time. Fortunately, there are only two types of standard option contracts: a call and a put.
The most common underlying securities are equities, indexes, or ETFs (Exchange Traded Funds). As an individual trader, you really only need to concern yourself with two forms of volatility: historical volatility and implied volatility.
Historical volatility represents the past and how much the stock price fluctuated on a day-to-day basis over a one-year period. Implied volatility is one of the most important concepts for options traders to understand because it can help you determine the likelihood of a stock reaching a specific price by a certain time. Options Trading for Beginners
Those are just a few of many commonly used words you’ll hear in a room full of option traders. Simply put, it pays to get your terminology straight. That’s why we decided to create an options trading glossary to help you keep track of it all.
The best thing you can do before you fund your account and start trading is to clearly define your investing goals. However, this does not influence our evaluations. Our opinions are our own. Options can provide flexibility for investors at every level and help them manage risk.