Since real money will be involved at some point, it might be advisable to spend a few months simply trading options on paper. It’s an approach most experts recommend and it’s a harmless method to learn option trading without real risk.
After you have spent some time tracking your trades on paper or with a spreadsheet, the least painful way to gain experience is to start trading options on a small scale until you build your confidence and skill. When you buy options with low prices under $2 or so, you do not need to risk much money at the beginning of your option tutorial.
If you are just beginning to learn option trading, it can be invaluable to choose a broker who will be able to help you with your orders. Selecting the correct broker is important, since with many discount brokers or online trading companies you must enter most or all of the orders yourself. While choosing to work through such a company may reduce your commission costs, thus boosting your overall returns, it may not be worth the price you may pay by forgoing expert assistance.
However, do not allow whichever broker you choose talk you into a “managed” options account. If you are intent on trading options, then it’s best to manage your own money. But this doesn’t mean that you should put all of your money into the options market at once. Many traders lose patience and buy into “sure bets” with all of their money, only to see their options waste away and their money disappear.
You should buy both call and put options, and make sure to diversify your funds. Look at the next several months or longer in planning how to spread your purchases over a period of time. You always need to understand in trading options that typically, put options profit when equity prices fall, and call options increase in value when these prices rise.
Be careful not to rush decisions. First of all, only risk money that, if lost, won’t cause you hardship (“poker game” money is OK, savings account money is not). Secondly, tomorrow will bring more opportunities so avoid purchases today that aren’t solid risk-reward options.
Rather than jumping into trading real options, start by spending a few months trading options on paper. This is an excellent way to learn option trading. After you have spent some time tracking your trades on paper start trading with options on a small scale. When you buy options with low prices under $2 or so, you do not need to risk much money at the beginning of your option tutorial. You should have an extended plan when it comes to purchasing. Spread your purchases out over several months or longer.
- David Baxwell
This entry was posted on Sunday, May 3rd, 2009 at 2:05 pm and is filed under Finance. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
