Options Trading Advice
People seeking option trading advice are typically either a novice to the options market
, or are accomplished traders having some difficulty with their active trades and therefore are hoping for a solution. If you are with the first category perhaps you are seeking some advice about how to begin options trading, what potential risks are involved and the way to prevent them, the best way to trade safely and still make steady profits. For those who are among the second category, there are ways to save or at least, salvage, losing trades, but this discussion must be left for another article.So what is the most helpful option trading advice for beginners?
The simple answer is, to make certain you first learn all there is to know about options trading, especially the concept of time decay, before you decide to risk any of your hard earned funds. Decide what kind of trader you would like to be. Do you want to be a day-trader, a short term trader or a longer term trader who only needs to look at your positions to see if you need to adjust them once daily and has approximately a monthly or longer strategy in place.
The next thing you might want to ask is, what underlying financial instruments do you prefer to link your options to? Stocks, commodities or foreign currencies? Whichever one you decide on, each of them have their own set of characteristics. Stocks can 'gap' overnight. Commodities may become very volatile. Currencies trade around the clock five days per week and are also affected by economic news items.
Remember also, that the shorter timeframes you intend to trade, the higher the stress and if you hold your positions overnight, the more risk of losing trades hurting your account.
The Dangerous Approach to Trade Options
In sharing option trading advice, we'd be remiss if we didn't bring to your attention the fact that, as with any business, there exists a high risk and also a safe way to do it. If your intended strategy is to merely buy call or put options in an endeavor to predict short term market direction and profit from these movements in just a few days, you should appreciate that although this carries a potential high reward profile so that it is appealing, there is also a much greater risk that the price moves against you so that your losses can quickly be greater than your profits. Many traders who attempt to forecast short term market direction have cleaned out entire trading balances.
You might believe you have discovered an option trading system that works for this kind of strategy. But if you would like some serious option trading advice here, you should ask yourself whether you have the personal self discipline to take stop losses as well as stay in trades for enough time to realize desired profits. Do you have enough free time to be able to concentrate and act when the need arises? The risky way of trading options often seems tempting to new traders mainly because of the simplicity of its approach and the confident prospect of generating considerable profits. But even well seasoned traders find market prediction difficult, so watch out for systems promising you the moon.
The Low Risk Way
Now this could be the best option trading tip you might ever receive. If you understand the concept of time decay, make sure you learn how to utilize this to your advantage. It is more advantageous to be on the selling side of an option contract compared to the buying side, due to this feature of options. Taking positions with about a month or slightly more to expiry date and being on the selling side of option contracts gives you a distinct advantage.
Even so you should also add to this advantage, the art of adjustments. Even with the advantage of time decay in your favor, the underlying price movement can come close to breaking through your breakeven points prior to option expiry dates and this is where you need to know what you can do. If you adjust your positions correctly at that point, you don't just save them from loss but guarantee additional profits in the process.
In connection with the above strategy, you should think about trading indexes rather than individual stocks. The reason behind this, is that you prefer a smooth price movement to a volatile one. While a news item may unexpectedly impact the price of a particular stock it will not have much affect on the index to which that stock is related. An index is the aggregate of a group of stocks like the Dow Jones, the Russell 2000, the OEX, QQQQ or the S&P500 in the USA. Options are available on all these indexes.
Trading double calendar spreads and iron condors on indexes and understanding how to modify your positions when necessary, is one of the best trading approaches I have encountered. My option trading advice to you would be to at least familiarise yourself with these and allow yourself to trade with confidence.
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