Many investors looking for “tips” related to options trading are actually hoping there’s some type of “special strategy” that will help them make a quick buck. The problem with taking such an approach is that there aren’t any tricks or strategies of the sort.
Any that seem to work are little more than gimmicks that only work under limited circumstances that may not happen too often. However, there are some trading tips that can help you make smarter decisions and increase your chances of making a profit in the long run.
Set Aside a Fund That You Use Just for Speculative Investments
Options are investment vehicles that expire relatively quickly when compared to others. This means that you can lose everything that you’ve invested in them if something goes wrong. Set aside a fund that you use for speculative investments and trade with it.
Never trade options with money that you can’t afford to lose. This can lead to making decisions based on emotion, rather than following your strategy, which often has bad outcomes.
Create Your Game Plan Before You Start
Creating plans “on the fly” is likely to lead to losses when trading options. Everything in the options market moves quickly, which requires you to figure out what you’re going to do and how you’re going to do it before you make your first trade.
To learn more about trading, you can also take a class online.
While there are many trading “game plans” that you can set up, most experts recommend starting out with a more gradual approach, as opposed to making “elephant trades,” which involve taking most or all of your funds and putting it on just one side of the market.
A good portfolio is one that is balanced, with money on both puts and calls. As you gain experience, you can refine your strategy to take advantage of more advanced moves, including directional and sideways trading strategies.
Know When to Take Your Profits and Cut Your Losses
This part of your trading game plan is actually more important than how many positions you take and the time you take them. Make a clearly defined decision as to when you will take your profits and when you will cut your losses once you take a position.
Then, be sure to stick to it. Avoid changing your game plan after you’ve gotten started unless there was something wrong with it in the first place.
Some traders will start deviating from their original strategy on taking profits and cutting losses and eventually end up abandoning that part of their game plan entirely, relying only on emotion.
The problem with emotion in the context of trading is that it will eventually make you take the wrong action at the wrong time, resulting in potentially costly losses.
Don’t Expect “Miracle” Results
Options that are cheap and far out of the money may seem attractive to some traders hoping for a big profit if a “miracle” was to happen. The chances of success when buying such an option is there, but it’s tiny. If you regularly buy such options, you may end up losing more money over time than if you had used a smarter trading strategy.