The Secrets to Options Trading
Secrets to Options Trading – Are there any? Well, secrets remain so only when they are not unveiled. Welcome to your journey of discovery.
Do you want to be successful in options trading? Is it information and knowledge only privy to mathematics wiz? Or, is it something that, with some effort on our part, possible to pick up the knowledge and profit from the endeavor?
Well, if you would like to believe that there are no perpetual secrets to options trading, and willing to take the time and effort to know and master them, then, we hope that you pick up some good ideas and concept from here.
In unveiling the secrets to options trading, we will not be going into complex mathematics, nor will we go into very specific details on option trading. What you will get from here is an overall framework and hopefully that will help you towards finding your very own best option trading strategies.
Option trading can be as risky or as conservative as you might want it to be. Like in trading other instruments, there are people who consistently make money and there are people who consistently losses money.
Likewise, in trading as in other professions, only the top few percents are the people who do very well - Do they know some secrets to options trading that others don't?
Some people may have stumbled upon some books on options and come across some complex mathematical formulae and being put off, thinking that option trading is rocket science and there are secrets to option trading that are not comprehensible.
The truth of the matter is that, it isn’t. Sit tight for the unfolding.
Man's mind, once stretched by a new idea, never regains its original dimensions.
…Oliver Wendell Holmes
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Secrets to Options Trading Number 1:
Know and embrace the risk of option trading.
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Secrets to Options Trading 1
Knowing and understanding the risk in trading any instrument is the first and foremost important factor you have to consider. The very best traders do not only know risks, they embrace risks. The first and foremost secrets to options trading is risk control and you have to ask yourself the followings:
• Do you know what is the maximum risk level you are taking in every new position taken?
• After knowing the risk level, does your financial situation allow you to take that level of risk?
• Plan your exit.
Make sure that you phase in your trades over a period of time instead of taking up maximum position at one go. You can also choose to scale up the trade size should your initial positions show you some money. Conversely, reduce your trade size or even stop trading if things aren’t going your way. It is Mr Market’s way of communicating to you that some things aren’t done right.
Your trading will only be successful if you can always keep your eyes on the risk and maintain a healthy respect for the market. History has proven time and again that the market goes wherever it wants to go, and can remain so for extended period of time, much longer than many people can stay solvent.
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Secrets to Options Trading Number 2
Know thyself and know thy trades. Start with an option strategy that you are both mentally and financially comfortable to deal with.
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The market is the best place for one to discover oneself. In situations where activities are compressed into a short time span, our true-self surfaced, and it may or may not be the way we know about ourselves. To be successful in options trading, you must know your temperament, your emotional makeup, your strengths and weakness, your risk appetite, and most importantly, yourself.
We all behave differently under different circumstances and that’s what makes us unique. Your ability to explore and find out about different types of trades which best suited your temperament and trading style is one of the critical factors towards your success.
Many people will spend time comparing and finding out about the features of a consumer product when buying it, say a Plasma or LCD T.V., or have great saving habits, however, the very same group of people could just ‘invest’ their hard earned money into stocks or options trades that they hear from the media or from the recommendation of their stock broker. It just does not make sense.
You therefore have to take the time to do the research about the underlying instrument that you are interested to invest or trade in as well as the type of option trades that are best suited for you.
For example, your strength has always been investing in good quality companies and you own these companies’ stocks. Your preference is to keep the shares for long term, collecting dividend and going for long term appreciation. You simply do not have the time nor the interests to pursue short term intra day trading. In this scenario, one of your best choices will be to sell call options.
By selling call option, you collect money from the buyer of the call option. In exchange for the money received, you have foregone the upside potential of the stock, while you stand to pocket the full amount of the premium received should the underlying stock maintain at the same level or move downwards. Your risk is no more than when you just own the underlying stock, as a matter of fact, the premium that you have received from the option will help to buffer some losses should the shares move down somewhat (however, do note that the buffering effect could be negligible if the share price move down substantially).
So, if at time when you are of the opinion that your shares is going stay level or maybe a little downward trending, you may want to consider adding writing covered call as part of your trading strategies.
Another example: You are a short term trader and have the risk appetite for short term swings. You are of the opinion that a particular stock is going to move up or down a lot at a certain time (e.g. results announcement, FDA outcome, sudden top level executives shuffle etc) and would like to speculate and leverage on using option to generate the returns for you.
In this case, you can buy the call (for upward movement) or the put option (for downward movement). You risk, while limited, could mean the whole of your option premium that you have paid when the share price did not go the direction you have predicted. Conversely, if the share price did go in the direction that you have predicted and in large movement at the precise timing that you have predicted, you stand to gain substantially from the position that you have taken.
In both the above examples, both approaches can be profitable, but if you did not trade according to your trading style and with an option strategy that you feel comfortable, your trading results could be sub-optimal or simply because you are not in syn with the trade regardless whether the trade turn out to be profitable. In another word, one of the secrets of options trading is to find your natural habitat.
It is therefore important for you to understand yourself, your emotional makeup and therefore the types of option trades that suits you best for you to constantly remain focus and successful in your trades.
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Secrets to Options Trading Number 3
Start Somewhere, Anywhere.
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Secrets to Options Trading 3
What we have to learn to do, we learn by doing.
…Aristotle
After finding out as much as you could about the various types of options and option strategies, you have to start somewhere. Choose an option strategy that you think you are most comfortable and start from there, and start small. The key here is to overcome the inertia.
You learn from the trades you make, especially the mistakes and you learn from the market. Your objective is to pay as low a school fee as possible in your journey to becoming a more and more proficient trader.
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Secrets to Options Trading Number 4
Plan your trade and trade your plan. Discipline.
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Secrets to Options Trading 4
It is very important for you to have a solid game plan before making your trade, how you would exit a winning trade and where is your stop-loss level.
It does not matter whether your stop-loss is mental or in the market, you have to be very clear when you have to get out when the market tells you that you are wrong. This will help you to eradicate bad habits and establish good habits.
Habit is either the best of servants or the worst of masters.
…Nathaniel Emmons
You have to create a sound trading plan for yourself. It is of paramount importance to have a good trading plan, it is like have the correct map to get you to where you want to go.
Once it is ready, it is there to serve you. Make sure that you avoid making trades that do not fit the framework of your trading plan and do not let greed nor emotion have an upper hand on you.
After you have entered your trade, you will have to stick to your trading plan to make the best out of it. A good trading plan will keep your emotion in check and help you to be disciplined.
Losing money when you follow your trading plan should never bother you, what you really want to achieve are trading results that are consistent and repeatable over the long run.
You have to recognize that you and only you along is responsible for the outcome of your trades, there will be no one and nothing to blame. Similarly, when you are successful in your trades, you will have no one and nothing to thank for.
In essence, make sure you have a sound trading plan, then, use it wisely to get to where you want to go, just like a good map will.
There you have it, the secrets to options trading. Remember, no one else is responsible for your success or failure, you are the captain of your own ship and you have to make the right decisions, steer your ship in the right directions, and overcoming obstacles along the way. Do not let anyone tell you it cannot be done, many people love to share their opinion, regardless whether they know the subject matter or you enough. Even if it cannot be done, that decision has to come from you and you alone.
To Your Success. 
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