Option trading advice is normally sought after by relative newbie’s to the options market – that or they are either more experienced traders running into difficulties and looking for answers about a current trade. If you happen to be one of those in the “newbie” category then you are most probably in search of answers to questions such as starting options trading, finding out about the many risks involved and as such wanting to know how to avoid these risks, how you can trade more safely while not jeopardizing that one main point to trading – making profits consistently. If you are somewhat experienced in option trading, therefore belonging to the second category, there are ways and means of saving/salvaging trades that appear to be losing.
Option Trading Advice for the Beginner
Before risking any of your money, you will need to get your head around everything you need to know when it comes to option trading – especially when it comes to the principle of time decay. You will have to try and figure out what sort of trader you are looking to become. Do you aspire to be a:
- Day trader
- Short term trader
- Long term trader
You will then have to ask yourself which fundamental financial instruments you would like to connect your options to – foreign currencies, commodities, stocks? Irrespective of which you choose you’ll find that they will each have their own particular characteristics.
- Foreign currencies can be affected by economic news, and are traded five days a week
- Commodities have a tendency to be very volatile
- Stocks may “gap” overnight
Option Trading Dangers
As with many types of “business,” there is “high risk” as well as “low risk” methods of doing things. If you concentrate on a strategy that simply attempts to predict a more short-term market direction, therefore trying to profit from potential moves after a few days, you should know that while the rewards can be high, they do not come without a substantial risk. There is the risk that prices can go against you, and it unfortunately isn’t heard of for some traders to have their entire accounts wiped out in search of this strategy.
Many inexperience traders may feel they have found the perfect trading system for such a strategy. But ask yourself this: do you have the personal self-discipline to not only take stop losses but manage to stay in a trade(s) just the right amount of time to glean the desired profits? Would you have/find the time to both act on and concentrate on required actions should the occasion arise? Market predictability is extremely difficult to master and even more experienced traders can face difficulties.
Option Trading the Low Risk Way
Probably the best advice you, as a newbie, can receive is the following: understanding the principle of time decay is vital and if you can master this then you can use it to your great advantage. Being on the selling side of a particular option contract is way better than finding yourself on the buying side. If you take a position with, for example, a month to the expiry date and you are on the options selling side, you will find yourself at a very distinct advantage.
There is another element on top of this particular advantage and this is mastering the art of adjustment. Despite having a time decay advantage on your side, you could find that underlying price movements can come perilously close to going past the break-even point prior to the option having a chance to expire – this is the point you have to know what to do. Correct adjustment of your position at this particular point will not only save you from potential losses, but might just guarantee some profits.
Furthermore, going on from the aforementioned strategy, you may want to consider trading indexes rather than just individual stocks. The reason for this is there is (usually) less volatility. While individual stocks can take a hammering when specific news stories break, the effect on the index that the stock is related to will be much lower. An index can be described as a group of stocks, for example:
- Dow Jones
- S & P 500
- Russell 2000
- OEX
- QQQQ
When it comes to option trading, if you could familiarize yourself with what we have mentioned above you will find yourself on the road to trading confidently.
