Learn Options Trading

How does one learn options trading?

Compared to trading stocks, the world of options at first appears complex and difficult. There are warnings on every options related site about the dangers involved, and plenty of opinion brokers who are quite willing to tell you that their particular option trading strategy is the best, and that all others are extremely dangerous. Learning to trade options is actually not that difficult, but you will need patience, and will need to take the time to understand the basic concepts and then the more complex strategies. Here are some steps that will help you through the maze:

1. Learn the basic terms and concepts. This inevitably starts with the simplest process, which is about calls and puts and how to buy and sell them. Unfortunately, this is also the most risky of the option trading strategies, so don't actually start buying and selling options just yet! Get the terminology under your belt, and understand in principle when you would buy or sell, and whether you would use a call or a put. You may want to paper trade a few times, just so that you can get your head around how it works. At this stage, you will encounter things called "Greeks", but don't panic about them just yet. Read up and get to understand the term "Delta" for now, and get a feel for how options pricing works. You should become familiar with the term "Volatility" and its influence, and you should understand terms like ITM, ATM and OTM for both calls and puts.

2. Learn a basic, safe strategy. Once you have the key concepts under your belt, pick on one basic, lower risk strategy. If you want to learn options trading, you must start at the safe end of the spectrum, in order to preserve your capital. Remember, the basic rule (before you get to thinking about profit) is "Don't Lose Money!". You may pick on something like credit spreads or covered calls, or if you are a little bit braver, look at DITM options. Try the strategy in different ways, in both a rising market and a falling market. Paper trade it for a month or two, until you are completely familiar with how it works, and where the dangers may lie.

3. Read some good books. There are a few really good ones out there, and there are plenty of expensive books that will scare the living daylights out of you! I recommend two books for someone who is just starting to learn options trading. The absolute best (with an awful title) is "Get Rich with Options" by Lee Lowell. Lowell gives some really clear guidance on some basic, safe and profitable strategies. The second is called "Options Made Easy" by Guy Cohen. This book opens up several strategies, with very clear explanations and particular detail in how to execute trades.

4. Learn Enough Technical Analysis. This is very important! You DO NOT need a doctorate in technical analysis or a finance degree in order to learn options trading. In fact, the more complex you get, the more danger you have of failing. For each strategy that you learn, make sure that you know exactly what aspects of technical analysis apply to that specific strategy. For example, if you are trading credit spreads, you need to know a very simple, two step method to identify a trend, and you should be able to identify lines of resistance and support. That's it! There is a real danger in applying too much technical analysis to your trading, and this can lead to mistakes, because of the complexity, or will lead to analysis paralysis. The higher the risk of the trading strategy, the more analysis you need, but build into your trading plan the exact factors that you need to know, and stick with those.

5. Practise! It is really important, as you learn options trading, to do a lot of paper trading. Use this to try out some extreme examples, and some risky trades, so that you see for yourself what can go wrong.

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6. Control your greed! This is one of the big killers of option traders. Start with a strategy that gets you an average of 5-10% profit per month, and do it consistently, before you take on bigger, riskier strategies.

7. Avoid Option Advisory Services. They are quick to take your money, but generally slow on performance. It is much better to learn for yourself how to do it, and then you can control what happens to your money. If you must use one, then make sure you have reviewed its results thoroughly.

As you progress with one simple strategy, you will start to accumulate more and more understanding, and then you can branch out to more complex and higher profit strategies. Options trading does not need to be dangerous, as long as you take a steady, even-handed approach that will not expose you to great loss. Anyone can learn options trading, but it does require some patience and self control!

You may want to look at some good options learning tools that I recommend, but at least start with all the free tutorials on this website.

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  • On this page I give seven basic steps for anyone who wants to learn options trading. The key is to control your greed, learn the key concepts, and the start with a safe, profitable strategy. The golden rule: Don't Lose Money!


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