I’ve been trading stock options since the mid 1990’s and it’s a lot of fun, especially now that I’m retired. I am by no means an expert. I can tell you first hand that it is risky and a lot like gambling. Fortunately, I’ve learned a ton from my many mistakes and failed strategies which is helpful to me to improve my average. It’s important to realize that we must only invest what we can afford to lose, kind of like going to Las Vegas. Below are some tips that you may find helpful as you get started.
- Technology is your friend as you begin to trade options so take advantage of the many trading tools available. A few of them are listed below:
- Charles Schwab has some amazing educational tutorials which can help educate you on investing. They also have an awesome platform thinkorswim® and it’s FREE and incredibly powerful. It gives you a trading account and a play account where you can pretend to buy and sell equities as well as trade options. Learn from their education library and before you spend one penny, do so with play money. You’ll be glad you did.
- CNBC, Bloomberg and Yahoo Finance have live investment content all during the trading day. You’ll get some immediate business news and some offer entertainment as well so not only are these educational, they are also fun.
- Finally, nobody has more experience as an options trader than Tom Sosnoff, co-founder of tastytrade who actually wrote the thinkorswim® platform that Schwab received when it bought TD AmeriTrade. If you want to learn from the best of the best, signup with tastylive as well as watch their 4-part OPTIONS WEBINAR SERIES and you won’t be disappointed, genius!
- Artificial Intelligence came on the scene long after I initially wrote this post so certainly use A.I. along the way for research and strategies when appropriate.
- Establish a set amount of money that you can afford or are willing to loose for your options trading account. I give myself just a few hundred dollars as an options budget each and every month making it a fun and hopefully profitable game for me to look forward to each week. Make sure to separate your retirement and long-term savings accounts from the account you will be trading options from and that will act as a firewall to protect you, mostly from yourself.
- When you are convinced that your crystal ball has given you insightful information about a trade that is sure to make you a multimillionaire, follow these three simple rules.
- Reduce the amount you were about to spend by half or more.
- Triple the timeline on your trade.
- Close-out your trade at least 21 days before expiration date.
- Don’t try and be all things to all industries and focus on one area and become an expert. If you have a background in technology, focus on that or if you worked in medicine before you retired, focus on healthcare. I traded a variety of active equity options for 5 years until I found my niche and migrated to trading only the VIX (a pure volatility trade) for a variety of reasons including “mean reversion”.
- Search for experts to follow and be diligent about staying up to date.
- Study Covered Calls as this could be your new best friend if you own lots of equities. Some financial institutions will even “borrow your shares” and do this on your behalf for a share in the potential gains.
- Finally, there’s plenty of time to learn all the sophisticated option trades such as the Iron Butterfly, Iron Condor, Straddles, Spreads and Collars as they can be very difficult to internalize. Stick to the basics for now, buying and selling Puts or Calls as well as selling Covered Calls if you happen to own the underlying equities and that should serve as your elementary options education for now.
I have two friends that are surfers, Griff and Angie and a parallel between options trading and surfing is this . . . THE ONLY TIME TO SURF IS WHEN THERE ARE WAVES!
RISK – Trading options may result in potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the options markets. Do NOT trade with money you can’t afford to lose.
Originally posted on 12-20-2020 and updated along the way.
