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Are You Trading Options Too Soon?

Everyone who has ever traded an option had to make the decision to enter an order for his/her first trade.  Some are seasoned investors, others are new to the stock market.

The experience you bring with you to that first trade makes a difference in how quickly you can learn to understand options and how they work.  Without that understanding, it's unreasonable to expect to use options effectively.

Please note:  All that says is that experienced traders can learn to use options more quickly because there are many aspects of trading they already understand.  It simply takes longer for the newcomer, because there is so much more to learn.

All that is obvious, so why mention it?

Because I constantly receive questions (e-mail, bivio.com, this blog, or through forums, such as EliteTrader, MotleyFool and TradeKing) from people who I know don't understand options well enough to be using real money to trade.  I always encourage them to spend some time on education and paper trading, but many have heard that options represent the path to instant wealth (I really dislike so many hypesters and liars  promoting that fairy tale) and want to get started as soon as possible.

The best I can do is provide guidance and education.

It's true that no question is too simple or too basic to ask.  If there is something someone doesn't understand, the best policy is to ask (the right person) to clarify the situation.  Over the years, I've been asked such elementary items as:

I own an option that is out of the money.  Must I exercise it?

I own an option.  How to I get my profit?

I paid $2 for an option.  Am I allowed to sell it for $0.50?

I'm not looking down on these questioners.  Just making the observation that people are gambling with options (I call it gambling if you don't understand what you are doing or how you can earn a profit) far sooner than they should be.

Learn first.  Trade later.

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