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Learning to Trade Options

In your attempt to search the Internet, looking for ideas on how to successfully begin trading options, you landed here.  You are in the right place.

Here are some tips on how to get started.  Some may seem obvious, but the purpose of this post is to save the options rookie from unnecessary grief:

1) It's easy to understand what an option is.  But that does not mean it's easy to begin trading options with any chance of earning a profit.

2) Do not believe it – when anyone tells you that you will make some very large (and quick) profits when buying options.

3) Most beginners look at options at lottery tickets, spend good money to buy low-cost options and never understand exactly what happened when they lose their entire investment.

4) Read.  Learn.  Ask questions.  I recommend one basic beginner's book and two websites for additional information and beginner seminars.

a) The Rookie's Guide to Options.  Now in it's second printing this book has received excellent reviews and testimonials.

b) The CBOE Learning Center.

c) The Options Industry Council (OIC) web site.

5) Before using real money, open a paper trading account with your broker.  Do not pay any fees to use that account.

6) Pick a broker who specializes in options. Consider Trade King, Interactive Brokers, OptionsHouse, thinkorswim or OptionsXpress.

7) Learn.  Understand what you are doing before you make trades.

8) Please accept this as true for now.  As you begin to gain experience you will understand just how true it is:  Managing risk and limiting losses is the #1 key to long term success.

9) Trade within your comfort zone

a) Don't make any trade unless you understand what you have to gain and how much money is at risk.

b) Adopt a strategy with limited losses
b) Don't make any trade unless you understand what has to happen to the price of the underlying stock (or index) for you to earn a profit. 

c) Don't make any trade unless you understand what has to happen to the
price of the underlying stock (or index) for you to lose the maximum.

d) The concept of 'volatility' and how it affects the prices of options may prove to be difficult to understand at first.  Don't give up.  Understanding volatility is vital when trading options. But don't make it your first priority.


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