If you are an individual investor who has successfully traded the stock market and has a working knowledge of what drives the market up or down, you are the perfect candidate to learn how to trade stock options. In fact, if you aren’t familiar with the stock market trading stock options is not a good place for you to begin your trading career. I would suggest that you learn all you can about the stock market and recommend a visit to the bookstore, as there are many informative books on the stock market.
Armed with the knowledge, and effective trading strategies, the options market can prove to be very profitable. Failure to educate your self and to practice strategies before you place your first real money trade is a formula for disaster. If you have a heart of a gambler, then the lure of the options market appeals to you for the action.
Options trading is not gambling so don’t make that mistake. Trading options is about acquiring the knowledge about an individual stock, identifying what move the stock is going to make, and then investing in the appropriate options contract. You will probably hear or read about a more sophisticated explanation, perhaps a fancy piece of software that will choose your options contracts for you, but at the end of the day it will boil down to the underlying stock. You will learn that lesson later.
There are many reasons that investors choose the options market. For the most part stock options give investors an opportunity for flexibility, leverage and low-cost. No matter what your reason is for entering the options market you can find ways to use it to your advantage, whether that be for the income, ensuring your position in the market, or for pure speculation.
Options give you the opportunity to effectively generate cash flow and income. Essentially rather than buying options, you sell options on the stock’s already in your portfolio. Basically you are renting your stocks to other people and they pay you for the privilege. This can be a very profitable way to use options, similar to an annuity or you receive income each month just for holding stocks.
Since we now have established that you are a seasoned investor in the stock market, you know that it is wise to hedge your positions. Options can effectively help you accomplish that. Let’s say you are holding a large position in one particular issue or stock. If you want to reduce risk you can use options to ensure our basically hedge your stock position in case of a market disaster. Options were actually created just for that purpose.
Speculators are often confused with gamblers and mentioned in the same discussion. While it is true that some speculators have helped nurture the belief that the options market is a get-rich-quick proposition, the options market is much more sophisticated than that. The idea that you can invest very little upfront money and leverage your investments to make many times more than you invested, is the general rule of thought by most people. There are options strategies that will allow traders to invest a little money and make a lot of money in return. However, using that thought as a foundational principle is a recipe for losing money.
Making money in any business nurtures entrepreneurs to develop systems that will help you make more money. The idea is that the more advanced the strategy or the more sophisticated software that more money you will make. It happens in every business. Essentially they are selling you the bigger and better deal, by selling in a software program, a seminar, or a set of DVDs with all the information you need to make money trading stock options.
Whether all these programs and materials will help you make money is not up for debate here. For the most part the more simple the strategy the more money you will make. There is simply less factors that enter in to your opportunity to make money. The more complicated or advanced strategy the more risk you take. Sticking with strategies that you are comfortable with are the strategies that allow you to sleep at night. This principle applies to any method of investing.
Options trading is confusing for most people in the beginning. In fact, it is easy to get bogged down just in the fact of the terminology used in options trading. Think of yourself as learning a new language. It’s not likely that she began talking as a baby as clearly as you do now and it’s not likely that you will learn all the terminology surrounding options trading in the first few days. The best way to learn is a step at a time. Everyone learns at a different pace.
Do not under any circumstances move on to the next level or the next lesson in learning how to trade stock options, before you are 100% comfortable with the information you have acquired. The temptation to do so will be great. You’ll watch the stock market you will see the market go on a nice run and you will feel like you need to be involved. You can make money in trading options in a down market, in an up market in a neutral market.
Don’t worry about missing opportunities to trade. There are opportunities every day in the stock market to make money and there are opportunities every day in the options market to trade. Missing an opportunity in the stock market is like missing a bus, there will be another one right behind it.
If however, you feel you must participate in any market prior to the completion of your education, open a paper trading account. Paper trading accounts are available through most larger brokerage firms. Paper trading accounts allow you to practice your strategies, without the risk of losing your capital. Later in your education process, we would suggest that you open and count for practicing your strategies anyway.