Option Trading – Are You Ready? Part 1

“Great traders have passion, confidence, an edge and a game plan. They are prepared, They keep their system simple.” – Gavin McMaster

I have been option trading for several years, and while my results have been up/down – what is important is that I have survived many different market cycles.  That should tell you a great deal, as surviving in this jungle call the ‘market’ without a life preserver is a difficult but not impossible task.  To me, success is not all about the bottom line results – it is about longevity.  I tell my coaching clients and chat room members that I would like to see them in five years and hopefully they are still in the game, not killing it but making a good living (if full time) and are much smarter and experienced than in the beginning.

We all need to post positive profit/loss figures (p/l).  Our accounts need to grow higher consistently to able to maintain our position.  But trading is a tough game, as we know it is not a game of perfect.  This means we often have to enter the ‘sea of the unknown’, or something called the future.

It is here where we often become uneasy as results could be really good or perhaps catastrophic.  But to avoid a disastrous outcome and being potentially put to the sidelines, we need a game plan, preparation, strategy, risk management, discipline and and to have our mind right.  We’ll a couple of these here in part 1 and the others in future articles.

Before you get involved with trading options you must have a good handle on the tools.  Options are not stocks, rather a derivative of the issue that offers a great deal of leverage.  The options we deal with are calls (bullish) and puts (bearish), and we can be buyers or sellers of each.  There are time constraints with options, as opposed to stocks.  Options have an expiration date, and they can be weekly, monthly or quarterly.  This added element is time decay and works against the buyer (but benefits the seller).  An option player MUST be aware of the time constraints and how it may effect a decision.  Timing a purchase is absolutely crucial to success.

When starting out, absorb as much information as possible.  There are many books, publications and articles that discuss different strategies for option players.  I have written scores of blogs on the explosive options website that range from the most basic to advance levels, and over the past five years we have recorded hundreds of webinars that are a great learning resource (and they are free!).  Learn about trading, but most important is getting in the game when you are ready to start.  They say ‘experience is the best teacher’, and nothing is more true.

Before getting started you have to know your capital limitations.  I tell every level of option trader to expect some losses and hopefully many winners.  But how can you absorb losses along with those wins and actually get ahead in the game?  You need a sound risk management rule in place, only risking a small amount per trade.  Where most traders fail and get wiped out is not being disciplined and setting good rules in place.

I have seen traders with bullet proof systems sink quickly because they lack the discipline, believing they are smarter than the market.  Those people are eliminated from the game, often never to return unless they learn to manage risk more appropriately.  Know how much you are willing to risk on a trade, for most it should be no more than 1-2% of your total capital.  Understanding when to say ‘uncle’ and take a loss rather than watch it sink to zero.  Accept the fact you will not win all the time, as said earlier trading is not about being perfect.

In our next article we will talk about having a game plan, feedback mechanisms and some other preparation techniques.