There’s nothing wrong with approaching options trading as a pastime in which you take large risks by focusing on buying cheap Out-of-the-Money calls in hopes of hitting a big payday. As long as you have money to burn! You can have your own private Las Vegas right in your home. However, being sucked in by the thought of unlimited profit potential and using options as instruments of pure speculation as a way to consistently making money is dangerous and unrealistic. This is especially true when you are buying a decaying asset, such as a short-term Out-of-the-Money option, you must understand the odds of long-term success are stacked against you.
There’s also nothing wrong with taking an occasional high-odds speculative position, but the majority of options traders who generate consistent profits and have a long history of successful options trading, base their trading on business-like rules and discipline, not personal gut feelings or tips.
If you are like most people, in these times of economic uncertainty you are looking for a way to earn extra money, that doesn’t take all of your time, preferably from home and that doesn’t require a lot of capital to get started. If you fall into this category then options trading might be just what you are looking for. Although trading is a simple business to get started in, it is far from easy to be successful at, and be wary of anyone or books that tells you differently. Also, you may have heard that trading options is risky, and while nothing in life is risk free, there are ways to substantially reduce the risk.
If you want to be a successful options trader you must treat your trading like a business. Most aspiring option traders fail to profit because they don’t know how to trade options like a business. Once you implement a few steps, you’re on your way to trading like a professional. To adequately teach you to be a professional trader I would have to give you a stack of book. However, with a few steps, you can be well on your way.
- Education, education, education! Along with “Main Street beats Wall Street” you must study all available material.
- You must develop rules and discipline! Try to refrain from even the occasional high-odds speculative trades. This is one of the hardest things to do. Write out a sound trading plan that details your trading approach and a sound money management method. A solid trading plan will detail the type of trades you will make, the type of trades you will not make and risk management.
- Find and develop a relationship with a mentor. You need someone to answer questions. Maybe even a group of friends to have meetings with to critique philosophies and strategies.
- Like any business you need to cut down on expenses. DO NOT work on margin as a Grasshopper. Read my section on Margin Accounts. Margin interest can cut deeply into your profits and even eat all of them. Brokerage fees are much less than in past years. However, commissions and fees can also eat away at your profit. Do not over trade!
- You must develop a stomach for this business! You cannot jump in and out of every position with every market move not in your favor. This will drive you batty and you will have large commissions and fees on your account. You have to find trades you are confident with. This talent is developed with education and experience.