People trying to find option trading advice are usually either a newcomer to the options market, or are accomplished traders experiencing some difficulty with their active trades and consequently are hoping for an answer. Should you be in the first group maybe you are trying to find some advice about how to get started on options trading, what risks are involved and how to avoid them, ways to trade safely and still make consistent profits. Should you be among the second group, there are ways to save or at least, salvage, failing trades, but this discussion must be left for another article.
So what is the best option trading advice for beginners?
The simple answer is, to ensure that you first learn all there is to know about options trading, especially the principle of time decay, before you risk any of your hard earned money. Decide what type of trader you wish to be. Do you prefer to be a day-trader, a short term trader or a longer term trader who only wants to look at your positions to see if you need to adjust them once a day and has at least a monthly or longer strategy in place.
The next thing you really need to ask is, what underlying financial instruments will you choose to connect your options to? Stocks, commodities or foreign currencies? Whichever one you choose, they each have their own set of characteristics. Stocks can ‘gap’ overnight. Commodities can become very volatile. Currencies trade around the clock five days per week and are affected by economic news items.
Understand also, that the shorter timeframes you are going to trade, the higher the stress and if you hold your positions overnight, the greater risk of losing trades endangering your account.
The Dangerous Approach to Trade Options
In providing option trading advice, we would be remiss if we didn’t bring to your attention the fact that, like any business, there exists a high risk and a low risk method of doing it. If your intended strategy is to simply buy call or put options in an endeavor to anticipate short term market direction and profit from these movements within a few days, you should understand that although this carries a possible high reward profile which makes it attractive, there is also a much greater risk that the price moves against you so that your losses can quickly outweigh your profits. Many traders who try to predict short term market direction have cleaned out entire trading balances.
Perhaps you may believe you’ve learned an option trading system that works for this type of strategy. But if you would like some real option trading advice here, you should ask yourself whether you have the emotional self discipline to take stop losses as well as remain in trades long enough to realize targeted profits. Have you got enough free time to be able to concentrate and act when the need arises? The high risk way of trading options often seems attractive to new traders due to the simplicity of its approach and the optimistic prospect of earning considerable profits. But even well seasoned traders find market prediction difficult, so beware of systems that promise you the moon.
The Low Risk Way
Now here is the best option trading advice you may ever be given. If you understand the principle of time decay, you should discover ways to utilize this to your advantage. It’s far better to be on the short side of an option contract than the long side, due to this attribute 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 clear advantage.
Even so you also want to 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 breaching your breakeven points before option expiry dates and this is where you must know what you can do. If you adjust your positions in the correct way at this point, you not only rescue them from loss but ensure additional profits in the process.
In connection with the above strategy, you should look at trading indexes as an alternative to individual stocks. The reason for this, is that you prefer a smooth price flow to a volatile one. While a news item may unexpectedly impact the price of one 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 knowing how to modify your positions at the appropriate time, is one of the best trading methods I have encountered. My option trading advice to you is to at least familiarise yourself with these and enable yourself to trade with confidence.
