I think I may be missing something as it relates to trading options. I've read The Rookies Guide and one thing that I don't understand is how do I pick the options to trade?
Do I need a background in stock picking?
A background in stock picking is not nearly good enough. You must have a proven track record of earning money when picking stocks.
However, If willing to adopt a less aggressive approach and try to find some stocks that will not fall significantly, then the selection task is much easier. Being forced to pick stocks that move higher is the norm for investors, and most cannot do it. Picking stocks that either mover higher, remain essentially unchanged, or decline by a small amount – that's much easier.
It's not foolproof. Nor is it guaranteed to return big profits. But your chances of earning money are much higher. In return for that 'good stuff' profits are limited and there are no killings to be made. The goal is to earn steady money. As I said, it's not guaranteed, but you have a better chance to succeed that the person whose stock picks must move higher to earn a profit.
Part of your question may be how to pick the specific options to trade. I recommend the credit spread strategy (Chapter 18) with one warning. Understand that losing is part of the story, and you must practice good discipline and not sell too many spreads at one time. Risk management is essential when you adopt this method.
When choosing specific options, you will have choices. If it's difficult to decide, open practice trades and see how they feel. Are you comfortable with risk and reward? Option trading involves a constant trade-off between risk and potential reward and a bit of experience goes a long way in helping you find the right choice.
Talking heads on TV tell viewers that 'it's a stock picker's market,' suggesting that investors cannot just buy index funds. Instead, they are to seek out the best stocks and buy only those. The missing piece of the puzzle is how to pick the best stocks.
The same problem exists when trading options with a directional bias., bullish or bearish. The truth is that most investors and professional money managers cannot beat the market averages. There is no reason to believe you can do any better. In my opinion, it is very difficult to generate profits consistently by adopting simple strategies, such as buying options.
I believe it's easier to find market neutral trades, but even then, picking stocks that are not going to undergo significant rallies or declines is not as easy as it may appear.
Indexes: less risky for premium sellers
If you lack confidence as a stock picker, then one alternative is to play the broader market by trading options on an ETF (such as SPY or IWM or QQQQ) or an index, such as SPX, NDX, RUT.
For the premium-selling, market neutral trader, index trading avoids the need to be concerned with the performance of a single stock.
Practice and practice some more
Take another look at the chapters on credit spreads. If you are new to this type of trade, and especially if you are new to options, begin by paper trading. Have patience. Be certain that you understand how these positions make/lose money. Determine how well you manage risk. Why does your position profit one day, or lose money on another day? Follow the trades using your broker's risk management tools. The purpose of this exercise is to understand why option prices change and to get some experience making trade decisions.
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