Advice For The Beginning Options Trader
Last updated on July 21st, 2020
How to make money trading options is an attraction for people looking to trade for a living.
Whether that means a full-time income or supplementing an income, the idea of doing that from home in less than a few hours a day is exciting to think about.
But is trading options for income in order to make a living realistic?
The great part about the options market is that they are very flexible, in that there are so many ways to approach them.
What Are The Benefits Of Options Trading
The benefits of trading options are many:
- Great leverage when trading options
- Minimal time needed to trade
- Profit in many different market states
- Risk is limited
Leverage: You are able to take advantage of great leverage when they place trades through their online broker. As retail traders we only have access to limited funds, so we need to make sure we make good use of those funds and leverage is one method we can use to do so.
Options allow us to control decent size positions for as little as a few hundred dollars. Imagine controlling one hundred shares of the stock Google for a fraction of the cost of actually owning the shares.
That is exactly what stock options traders are able to do.
Minimal Time: Unlike day traders, you are not sitting in front of your monitor watching all the flashing quotes. You can view your charts once a day and decide if there is any options trade setting up. This is perfect for someone that is busy with another job, family commitments or even enjoying retirement.
Trading for a living does not have to mean living to trade. That is one of the major drawbacks of day trading but is one of the many benefits of options trading.
Profit In Many Market Conditions: Options are the only instrument available that will allow you to profit from up, down, or sideways moving markets. This is powerful because it allows us to profit regardless of what the market is doing. This is very important for a trader looking to make a living from the markets and trading full time.
Limited Risk: Your risk is limited to the cost of the option. You can set up strategies where the risk of loss is minimized but the trade potential is extremely high. Every trader will tell you that capital preservation is job #1 for any trader.
You can make money on premiums if you are an options seller. Many professional options traders who make living trading these markets do so by banking the premiums by selling options.
How Do You Become A Professional Options Trader
Getting involved in the options market is not a difficult process. Of course, you have to find an online broker and have the funds available to trade but you can fit how to become an options trader into 3 different areas:
Find an options trading system that gives very clear entry and exit points.
One of the biggest mistakes traders make is to get into a trade without a plan. Without a road map to follow, the emotional aspect of trading kicks in and mistakes can be made. With the Netpicks Options Fast Track system, we have clear entries, targets, and stops printed for us right on the charts.
There is no guessing when to get in and out. Everything is outlined for us. With a system in place that puts the odds in our favor, we can trade with confidence.
You can see below the exact options system I use when I made a 88% return on an options trading in GS.
Find the markets that fit your trading style.
Another big mistake I see traders make is to trade too many markets that they aren’t familiar with. The best part about options trading for a living is that they allow us to trade some of the high flying stocks like Apple and Google.
Most successful traders that I work with trade the same stocks and ETF’s day in and day out, which really allows them to trade full time with confidence. There isn’t any stock scanning that needs to be done on a daily basis. Trading the same list of names allows the trader to get familiar with how those products move.
If you are looking for high frequency, then consider more tech names like Apple and Netflix. If you are looking for less frequency, then you can always focus on ETF’s which allow you to get exposure to a whole basket of stocks.
People oftentimes shy away from looking into the stock market as a source of income because they think there is a high failure rate. Like any other business, there will be people that struggle to succeed. One reason for this is they take on way too much risk.
Regardless of your account size, you need to make sure you are using proper risk in your trading. This means making sure you spread out your account across different products instead of putting all your money in 1 or 2 positions. Any options trading success story you will read will tell you that managing your risk is one of the most vital things you can do as a trader.
The more you can diversify, the smoother your equity curve will be. Trading options really allows us to diversify better than most products out there. We can trade more instruments because of the leverage that they offer.
When you think of diversifying, also consider whether you should trade weekly options or even monthly. This will simply add to your trading repertoire and not have all your eggs in one basket.
We can also use different options trading strategies that allow us to profit from different market conditions and trade full time for a living.
Is Day Trading Options For You?
Over the years, traders have added day trading Options alongside their other approaches to the market. With the ability to take advantage of high powered and high price stocks with little money, trading Options on a daily basis is a viable way to capitalize on this market.
But is this approach for you?
As with all trading approaches, day trading Options come with pros and cons that every trader interested in Options trading should be aware of.
Day Trading Options – The Upside
- Great leverage allows you to control the high priced stocks for a fraction of the cost
- Trading the weekly options can lead to some very large moves quickly. The options react faster
to changes in stock price the closer you get to expiration.
- One quick trade can provide some great profit especially when day trading towards the end of
- Day trading Thursday and Friday using the weekly options can provide some very
Day Trading Options – The Downside
- You never know when the big moves are going to happen.
- In order to see consistent results, you need to be by the charts all day long.
- Day trading futures can be much easier as we are typically able the moves take place at more predictable times.
- You need to look at a bigger watch list of stocks and ETF’s as you don’t know which names are going to be active that day. This requires more prep work to be done on a daily basis.
- If a trade takes too long the time decay and volatility movement can lead to larger losses.
Before considering risking any of your trading capital on day trading Options, ensure you find the downside acceptable. If you don’t, there are other ways to benefit from the versatility of the Options market.
Do Options Traders Make Money?
The answer is, “it depends”. You get out of it what you want and how you prepare to trade for a living, you must have many variables (such as the ones we talked about above) in line.
One thing we talk about is logging all your trades to ensure you are not slowly bleeding your account dry. Using an option trading spreadsheet to ensure you log all your trades is one step you must take to ensure your trading edge is still valid.
Here is another trade I took with my options trading strategy:
Some may say that $275 is not much to live on and that is true. This represents one trade. Options traders usually have several trades running and given that you can make money in any market condition, I think you can see the potential.
Trading is a profession and the better you are prepared, the higher the odds of success will be.
Some Key Terms You Should Know
As you learn to trading options, you will come across the same terms that you must know:
- Call Options – Gives you the right, but not the obligation, to buy the underlying security at a specific price on a specific day
- Put Options – Gives you the right, but not the obligation, to sell the underlying at a specific price on a specific day
- Strike Price – The strike price is the specific price at which you will buy or sell the underlying stock
- Contract Expiration – This is the day the options contract expires and the trader may execute their right to buy or sell the shares
- Premiums – Option premiums is the price paid by the buyer of the options contract to the sells of the contract. These are quoted on a per share basis.