5 Options Trading Tips for Beginners
Posted by Pete Stolcers on October 13, 2009
Option Trading Question
Do you have any tips for beginner traders?
Option Trading Answer
When you are first getting started in options trading, it’s difficult to know just who to trust for information. The fact is that anyone who promises great riches in option trading is probably not someone you want to pay attention to. While it’s definitely possible to earn money with trading, you want to start slowly and build your way up to the bigger risks. Learn everything you can before you get started. With that in mind, I’ve compiled a few tips that every beginner should start out with.
- Learn to analyze stocks. You can’t expect to just jump into options trading and be an instant winner if you have no stock experience. Learn to pick stocks and analyze them, then start looking at options.
- Study, study, study. Options trading requires taking risks, but there’s no need to take more than you need to. Learn everything you can about stocks and options. Reading is probably your best bet. I would suggest books that cover technical and fundamental analysis. John Murphy, Martin Pring, Warren Buffet and William O’Neil have all written excellent books on these subjects. Larry McMillan is another very good author who focuses on option trading.
- Use option trading as a portfolio extension. With options, you have the flexibility to choose your risks and rewards. Don’t look at them as complete gambles, take the time to analyze and then hedge and make some income.
- Keep it simple. There are a number of strategies that you will hear about but which should NOT be used for retail trading. These include delta neutral, calendars, ratio back-spread, iron condors, back-spread, gamma neutral and butterflies.
- Start out with some capital. If you don’t have the money to risk and potentially lose, you should not be in the game. As a general rule, you should have $10,000 of speculative risk capital and this should make up less than 10% of your portfolio. Options are complicated and you can lose everything in the blink of an eye if you aren’t paying attention, so keep that in mind.
Option trading can be very rewarding, yes, but you do need to be prepared. Take the time to learn all that you can before getting started and make sure that you have the cash to work with. Stick to simple strategies and don’t underestimate the potential risk you are about to take. Follow these tips and you’ll be off to a good start.