Option Trading – Where to Start ?

where to start with options trading

Trading Stock Options

Trading stock options is a very large, detailed topic and I think there are some excellent books that will explain it for you better than spending hours searching the internet for free information on trading stock options.

I know there are tons of sites out there touting they make huge returns with options(by paying for their product/service of course) and I get spammed by those services on this site all the time. Honestly, MOST TRADERS SHOULD NOT TRADE OPTIONSĀ  AS MOST LOSE MONEY TRADING THEM OVER TIME (Just like most investors should avoid the latest craze to trade FOREX) .

New investors think that options are just a cheaper/leveraged way of buying stock and they just buy the options instead of stock shares. Then they watch the stock move higher over the next month and see their options stay flat or go down and wonder what happened. Understand that the options market has some of the most sophisticated trading and traders out there everyday systematically finding the slightest pricing disparities and “arbitrage” opportunities between the option and its underlying stock.

If you decide to trade options then you have to put in your work and have a true understanding of how the price of an option is determined and how it moves vs. the underlying stock. If recklessly buy options and don’t understand terms like volatility, open interest, delta, intrinsic value, etc……then you will lose money.

Understand that short term options can sway dramatically in their price based on the volatility(movement) of the underlying stock and and if you don’t understand the dynamics of pricing an option then you will probably end of overpaying for an option and just end up seeing it expire worthless like many new traders do.

Like anything options take knowledge and time to be successful at it and usually more trader will lose money than make money in them. If you are losing money in stock trading then don’t trade options. Read some books on options first and paper trade options for a while first to keep the emotions out.

If you decide to just make plain direction trades with options (ie – buying calls on a stock you believe will move up) then make sure you give it enough time for the option to work(expiration 3+months) and don’t overpay for the option.

If you think trading stocks gets stressful then options are much worse so keep option trades small and know your exit strategy because expiration time will wipe out your options price faster than your think. Also, the option market likes to pick apart retail traders (retail orders are pretty obvious to market maker when they see order to buy something like oddlot of 6 or 7contracts) so I always recommend using limit orders when buying options and whatever you do control your risk on options and DON’T SELL NAKED. (Also make sure the underlying stock that the option is derived from is VERY LIQUID(aka Trades a lot) or you will get hurt on options)

In summary, options are more complicated than stock trading and there are lots more elements to be profitable in stock option trading than just buying a call because you think the stock will go up or buying a put because you think the stock will move down. I would stick to stock trading first and have a good understanding of stock charts before trying options. Don’t just get into options because they are “cheaper” than buying shares in the stock.

If you try options then first have a good understanding of how they are priced and keep your orders small with limit orders. Also keep your initial option strategies simple. (Don’t open an option account and start trying to put on bull call spreads or some other strategy as your first trades because you read a book).

Generally I think most traders will lose money in options and are best avoided but if can buy some at the right time for the right price to enhance your long or short position then they can be pretty rewarding.

Trust me when I day that I have learned many of the mistakes of options the hard way (I was in my early 20’s during the .COM meltup/down about how fast options can move up and move down). As the stock market saying goes, UP THE ESCALATOR, DOWN THE ELEVATOR.

- www.kinetictrader.com

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