Options Education; Spend Your Time Efficiently

I've been reading a variety of blogs and have come across some interesting ideas that are applicable to my world – that of an options investor/trader.

One such post (a guest post, written by Ramit) warns readers that most people waste too much time by focusing on items that may seem to be beneficial, but which contribute essentially nothing to the overall goal. 

"One of the problems with starting a new business is that you have an infinite number of choices for ways to start earning money…She picked a crisp goal, eliminated all the possible things she could do, and decided to focus on tactics that would take her directly to her goal. That's the importance of reducing choices and focusing on the things that matter."

Focusing on things that matter.  That's the key.  There are  people who will tell you what you should do, or must do.  It's very likely they have no idea what it takes for you to succeed.

As a trader, one goal is to make money.  Another goal could be (I'm avoiding telling you what you should do) understanding how adding too much risk can destroy your chance for success.  Perhaps you have additional goals.  Your job is to find a good path towards meeting those goals.

For the vast majority, trading options is not a business.  But treating your plan to use options as if it were a business makes it more efficient to take the necessary steps towards achieving your goals.

You could rent an office, get state-of-the-art computers, buy packages of trading software, read every trading book you can find, etc.  But that's overkill for any beginner.  Whether it's an appropriate way to spend your time and money – after you have proven you have a a business – i.e., you earn money when trading – is a personal decision.  I never did any of those things. 

But it's not a good way to get started.  None of those steps give you the necessary skills or education.  [Too many books will provide conflicts.  Reading more books is a good idea to expand knowledge – after you understand the basics.]

If you are at the stage of deciding whether to learn about options, it's important to understand how options work and what they can do for your investment portfolio.  If you think options provide the path to instant riches, you are mistaken.  I use options to hedge – reduce the risk of owning – investment positions, and I hope to encourage you to use options conservatively.  Doing so allows plenty of room for profits, with limited losses. 

I recommend you spend your 'options education time' doing things that help you meet your objectives: protect your assets and earn money with less risk than the investor who buys and sells stock.  To begin, pay attention to the most basic concepts of options and how they work.

Ask your broker for the paperwork necessary to begin using options and open a practice account.  The broker may call it paper-trading or virtual trading.  Take advantage of such an account.  It allows you to become familiar with your broker's trading platform, and also allows you to make trades – all with no risk (yes, there's no reward either.)

Then study some basic option strategies.  I recommend my book, The Rookie's Guide to Options, but here are two sites that offer decent information at no cost: The Options Industry Council and CBOE.  

None of this is a waste of time.  Each step provides a benefit that moves you closer to your objectives.  When trading you'll get practice choosing specific options to trade.  You'll learn how option prices move up and down as market conditions change.  You'll learn what can go wrong, and how money can be lost.  That, in turn, helps you appreciate risk.  You will also learn what it takes for trades to become profitable.  All of that occurs as you gain experience with various aspects of buying and selling options. 

You can pretend you signed a contract to become a starter in the major league of options – but first you get to play and learn in the minor leagues – where your pay may be zero, but so is the tuition.

Ask questions of people you trust. Join an online forum, but be aware that not all of the information can be trusted.  Don't spend big bucks for costly seminars.  Have patience, and when ready, begin trading with small sums of real money.

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6 Responses to Options Education; Spend Your Time Efficiently

  1. GMG 03/20/2009 at 9:53 AM #

    Great points Mark,
    I’m in this exact position right now. I won’t be quitting my day job to trade options anytime soon, but I know there are real things I can do right now to move toward that goal. I think one of the worst “prerequisites” I hear from other traders is that you MUST have $_______ in your account to even begin trading. How ridiculous! As you mentioned, there are some excellent papertrading programs out there, and once I have a comfort level with a few strategies what’s to stop me from making small trades with real money? Absolutely nothing. Obviously I can’t quit my day job and live on that income now, but so what? For now I’m planning my options (paper) trades after work and executing them during my lunch break if my initial conditions are still met.
    That’s not going to make me a multi-millionare overnight, but it’s a step in the direction I want to go. Once I get to the point of trading with small amounts for supplemental income I’ll be thrilled. In my opinion that IS a solid start to eventually trading full time.
    I also enjoy expanding my general knowledge base about all different types of strategies, but I try to eliminate those that don’t seem to fit my risk/reward profile and move on. I’ve settled on some of the same strategies you use (condors and some calendars or double diagonals) as well as using verticals in a pairs trading strategy. That’s really enough for me…if I can focus my time and hone my skills with that small sub-set of the options universe I’ll be making real money eventually.

  2. Mark Wolfinger 03/20/2009 at 10:18 AM #

    Regarding the strategies you selected: It is enough for you. And may always be enough. But market conditions change and you don’t want to have a closed mind. At a later point in time, you will want to re-consider other strategies. Why? When you understand how options work from your own experience, there’s a chance that an alternative will feel better. But for now, it would be a time waster.
    Focus your time on what is important – honing skills.

  3. atbright 03/20/2009 at 1:26 PM #

    While I agree that paper trading is the best place to start to begin learning about a particular option strategy, I believe you must have some money on the line to truly begin to understand a position. I believe this for two reasons, one practical and the other more abstract. First, when you have your money on the line I feel it sharpens your senses and allows you to learn important lessons more quickly. Nothing cements a particular lesson like watching your account lose value. And try as anyone might to be realistic, a paper trading account always gives you the ability to reset the account. The second reason I think you need real money experience with options is the practical situation of obtaining fills for your orders. When I was paper trading, the platform I used mostly filled at or around the midpoint and filled my orders very quickly. This created a very tough situation for me when I transitioned to real money trading. First off I lost the bonus of being filled at the midpoint so easily. And secondly, I became frustrated when I identified a trade I liked and then took half a trading day to fill the position. The same problem can also occur when trying to exit a trade. Anyway, my point is that after paper trading the theory one should use real money, but a very small amount, to learn to trade. This will allow one to learn all the aspects of options trading without risking too much capital.
    ATB

  4. Mark Wolfinger 03/20/2009 at 1:58 PM #

    There is no doubt that the vast majority of paper-traders do not achieve the maximum benefits. Losing real money teaches a lesson.
    The reason I promote practice trading is to give the beginner a chance to learn more easily. A broker’s trading platform can be unintuitive, requiring practice.
    Your point that some broker’s (TOS, for example) provide easy fills when paper trading is very important. I believe that’s dishonest of the broker and hurts the client. Fortunately some brokers are much better (IB).
    The true beginner has never used options. Thus, making a trade gives the investor a chance to get a feel for how option prices change. Of course, one can learn that without taking a practice position, but it’s more realistic. More importantly, it allows someone to open a calendar spread, covered call, or iron condor. The trader gets to see the position greeks, and perhaps learn something useful.
    I suggest virtual trading to learn more about options. Real money affords better practice, but paper-trading is better than just closing one’s eyes and getting started.
    Paper trading is only as important and the novice believes it is. Making ‘what the heck, I’ve nothing to lose’ trades serves no purpose. Refusing to adjust just to ‘see what happens,’ is not a good learning experience.
    Successful traders lean to trade without emotions. Because there’s no money involved, perhaps paper trading can help the newbie trader understand the value of emotionless trading.
    I know it’s less than real trading, but if used for the right reasons, it can be a learning experience.

  5. Gil 03/20/2009 at 8:11 PM #

    I agree with what has been written. As an active options trader I would like to ring up a related issue:
    Even after you’ve got a solid self education (books, internet sites and webinars, paper trading and even live trding) – the nature of the options world is that there is always a lot to catch up, in this risk reward sophisicated area. The issue is: after “graduating” yourself… does it make sense to practice with eal money on your own (starting with modest amounts, of ciourse), or to get a mentor to walk you through complicated stages like: making the right entry to the right trategy, set up exit points, adjustments, repairs and more. There are companies out there which charge couple of grands, usually accompanied by risk free guarantee (if you don’t make money, you get refund). As for myself, I do try to get around on my own, unless I find some mentoring program in which I pay gradually reasonable amounts, and see results as I move forward. What do you think?
    Gil

  6. Mark Wolfinger 03/20/2009 at 10:03 PM #

    Good questions.
    Reply as a separate post: 3/21/2009