Investors are always looking for tips to help improve their options trading results. We are no different, so we created a list of 54 tips for options traders.
Trading options the right way allows you to have a high probability of success, which leads to consistent trading profits. In fact, we can construct options trades that win over 70% of the time.
The key to having success in the options trading business is by staying consistent and learning the right strategies (see #47 for a perfect example). If you don’t trade the right strategies with high probabilities of success, you won’t see the results you were hoping for. So stick to the plan and learn how to trade options the right way.
If you are ready to invest in yourself and learn a skill that will pay dividends into the future, you have come to the right place.
A lot of the options trading tips listed here are ones we use every day in our own daily trading routine and have seen the tangible benefits first hand.
Options Trading Tips For Success
Here are 50 tips for new options traders to take you from beginner to professional options trader.
Options Trading Mechanics
1. Trade the monthly options contracts
Liquidity is king. Liquidity is a measure of how easy it is to get in and out of positions at a fair price. On one hand, there is real estate. Real estate is fairly illiquid. Transacting real estate is a time consuming and costly process.
On the other end of the spectrum is cash. Cash is the most liquid asset because cash can quickly be converted into any good or service.
In options trading, some option markets are like real estate – very costly to move in and out of positions.
Some option markets are very close to cash, where it trades very easily and at a fair price. The monthly options contracts, as opposed to the weekly options contracts, are the most liquid and have the most activity.
2. Set up your trades with greater than 50% Probability Of Profit
The beauty of options trading is that we can craft strategies that have upwards of a 70% probability of profit if traded correctly. Stock trading only has a 50% probability of profit. Options trading has a huge advantage.
You simply cannot be profitable if you have to consistently hit home-runs on your trades because you only win 50% of the time.
It is so much easier to become successful if you see profits on your trades 70% of the time, even if your profits are smaller in size. This is how you win the game – by consistently hitting singles.
3. Use implied volatility in your decision-making process
As options traders, implied volatility is at the center of our decision-making process. Our market edge comes from the overstated nature of implied volatility.
In environments of low implied volatility, you want to be wary of selling cheap options. This also might be a time to place strategies that bet on increasing implied volatility. Types of strategies that would benefit from an increase in implied volatility include calendar spreads, diagonal spreads, and debit spreads.
However, in environments of high implied volatility, you want to be wary of buying expensive options. A high implied volatility environment is one where you want to be selling expensive options. Types of strategies that benefit from a decrease in implied volatility include credit spreads, iron condors, and strangles.
4. Close your trades at 50% of max profit
The majority of our trades focus on selling option premium. These types of trades have limited profitability with a high probability of profit.
Typically newer traders want to hold the position until they collect 100% of the premium or credit received. Though this may sound great on paper, it is a terrible risk-reward proposition. If you have already earned 50% of the maximum profit potential, you are now risking profits in addition to the original trade risk.
Instead, we close our positions at 50% of our maximum profit potential and redeploy our capital into new trades with a favorable probability of profit. By closing your trades at 50% of max profit, you are breaking the cycle of the zero-sum game and further increasing your theoretical probabilities of success.
5. Choose the closest expiration to 45 Days To Expiration
When selling option premium, 45 days to expiration is the point in time where theta is maximized, while minimizing gamma risk. Theta is the amount of time decay in an options position. As options sellers, time decay is good because it allows you to buy back the options at a cheaper price for a profit.
At first glance, one may think that we should sell options with the highest theta (closest to expiration). However, this increased profit potential is also met with an increased risk in the form of gamma risk, where the option begins to move more like stock.
Instead, we like to trade options with the closest to 45 days until expiration. This is where theta decay begins to accelerate, with minimal gamma risk.
6. For losing trades, roll out to the next month at 21 Days To Expiration
30% of our trades will be losers, just by the probabilities. However, we have strategies for managing our losing trades call rolling. Rolling is when you close out of the current position with fewer days until expiration and open the same position in a further out expiration cycle. By rolling our losing trades, we collect additional credit, offsetting some of the unrealized losses, and reduce our position’s delta or directional risk.
The ideal scenario is when we can indefinitely roll our losing trades, in hopes of it becoming a scratch (break-even) or even a winner as time passes.
21 days until expiration is the ideal time to initiate the rolling process. Past 21 days until expiration, gamma risk begins to pick up. Gamma risk is the risk of greater profit and loss swings in your account as the options move more like the stock as expiration approaches. By rolling at 21 days to expiration, you eliminate that unnecessary added risk.
7. To defend losing positions, roll the untested side to collect additional credit
Another tactic for defending losing positions is to roll the untested side of the position to collect additional credit.
Let’s say you sold a strangle for $1.00 in credit. However, the stock has breached the call side of the trade and is now taking on losses. If this were to occur, the put side would likely be worthless (full profit).
To defend the losing call side of the trade, we would roll up the untested side of the trade (the put side) to a strike that is close to 30 deltas. By doing this roll, you would collect an additional credit, say $0.75. This additional credit would push your break-even price out by $0.75 to the upside.
The same, but the opposite would be true of the put side of the strategy was tested by the stock price.
8. Don’t adjust losing defined risk strategies
Defined risk strategies have a defined amount of money they can lose. This number is known when we enter into the trade. Though we would like to do something to mitigate losses, defined risk trades are not suitable for rolling. The defined risk nature of the strategy is what we used to mitigate our losses.
Whenever we roll or adjust losing trades, we want to do so for credit. Rolling for credit increases the amount of premium collected and improves our breakeven price.
However, due to the nature of defined risk strategies, we have to buy options against the options we have sold. This makes rolling for credit often impossible and we would never roll for a debit.
Rolling for a debit does the exact opposite of rolling for a credit – reduces the premium collected and narrows your break-even prices.
9. Diversify your portfolio across product, direction, and time
There are three ways you can diversify your options portfolio: by product, by direction, and by time. You don’t want to have your risk concentrated on one area because if something were to go wrong, you don’t want to be wiped out. The goal of options trade is to be able to trade another day.
- Diversifying by-product means trade different underlying. Trade some Apple stock, some gold, and some bonds. Don’t trade only one stock or underlying.
- Diversifying by direction means don’t have all your directional risk on one side. Have some bullish trades, some bearish trades, and some neutral trades.
- Diversifying by time means to spread your positions out across different expiration cycles. Different expiration cycles behave differently to the changes in stock price and volatility.
- When selling strangles, collect at least $1.00
Short Strangles is one of our go-to strategies because of their high probability of profit and increased profit potential. When selling strangles, we typically look anywhere between 16 and 30 deltas for our strike selection.
However, one of our criteria for the trade is that we have to collect at least $1.00 on the trade. This allows us to filter out potentially unprofitable trades and maximize our return on capital.
10. Allocate no more than 5% of your account to anyone trade
Options trading is a game of probabilities, where each trade is an independent event. It can either win or lose.
Just because we trade strategies with a high probability of profit, doesn’t mean that every trade will be a winner. Unfortunately, we don’t know ahead of time which trades will be winners and which will be losers.
Because of this, it is important to keep your position size small (less than 5% of your account value). This way that if one trade goes wrong, you don’t wipe your account out.
Remember: the goal of trading is to be able to open your business the next day. If you are unable to open the next day, you are unable to recoup those losses.
11. Trade small, trade often to increase your number of occurrences
This goes right along with the previous tip. If your position size is too large, you end up with a few large positions. Not only does this concentrate your risk into a few positions, but also it prevents you from realizing the theoretical probabilities.
The game of trading is all about the law of large numbers. Say you were to flip a coin 4 times. It is certainly possible for all four coin tosses to come out as heads due to random luck. However, if you were to flip a coin 100 times, it is far more likely to reach the theoretical probabilities of 50% heads, 50% tails.
This same principle applies to trading. We theoretically have a 70% probability of success, however, you are only going to see those theoretical probabilities if you trade enough occurrences.
12. Don’t leg spreads
Most of the options trading strategies that we use involve multiple options contracts, called “legs’.
Multiple options legs create an options spread. For example, a short strangle consists of selling a call and selling a put simultaneously.
Legging a spread would mean selling the call and put at different times, trying to “time the market”. The goal of legging would be to make your window of profitability larger and to maximize the premium collected individually for sold call and sold put.
However, it is nearly impossible to time the market. You will most likely end up filling one leg of the trade, while completely missing the other leg, turning your spread trade into a single option trade, which is not what you originally wanted.
Instead, you are better off filling your options spreads in one order.
13. Before entering into a trade, check for earnings and dividends
Earnings and dividends are two corporate events that can affect your options positions.
Every quarter, all public companies release their earnings report to the public outlining how well or poorly the company performed for the past quarter. If the company did well, the stock price typically shoots higher, while if the company did poorly, the stock price typically falls.
Due to the heightened uncertainty around an earnings report, implied volatility tends to increase. This increase in implied volatility affects our options positions. It affects options negatively if you are selling premium and positively if you are buying premium.
After the earnings report is released to the public, the stock price can swing wildly in one direction or the other. It is important to be aware of this event so you are not blindsided by the earnings report.
Dividends are cash payments by companies to their shareholders for investing in their company. The ex-dividend date of a company is the date at which if an investor buys stock after that date, they won’t receive the dividend payment.
Any in-the-money short call is at risk of exercise before the ex-dividend date. This is because the long call holder will want to buy the stock just before the ex-dividend date so that they can receive the dividend payment.
14. Reduce the cost basis
If you own an asset for $100, wouldn’t it be great if you could own it for $75?
This can be achieved through cost basis reduction. Cost basis reduction is when you sell an option against either a stock or options position to offset some of your cost. This is possible because you are limiting your profit potential in exchange for a higher probability of profit.
Let’s look at an example. Say you own stock at $100 per share and the current market price is $100. This position would have a 50/50 odds of winning because the stock can either go up or down. Let’s say you sell a call against your stock position for $1.00. Because you collect $1.00 in option premium from the call option sold, your effective ownership of the stock is now $99. The stock now only has to stay above $99 for you to be profitable, increasing your probability of profit.
15. Don’t buy out-of-the-money options
Buying out-of-the-money options statistically have the lowest probability of profit. This is because the stock price has to move in your favor fast enough to overcome time decay.
If you have ever bought options and were right on stock price direction but lost money, that is because of time decay. Options are decaying assets, meaning they decrease in value bit by bit every date.
The amount of decay can be measured by theta. This is why you can be right on stock price direction and still lose money. The time decay portion of the option price overpowers the directional move in the underlying stock price. Because of this reason, this trading strategy has a low probability of profit.
We typically sell out-of-the-money options for the exact reason that buying out-of-the-money options are bad. Selling out-of-the-money options has a high probability of profit. This how we can be wrong on stock price direction and still make money.
16. Don’t double down
Traders can always fall into the trap of trying to double down on an options position to recover losses on a previous trade. This is also called revenge trading.
You always want to be able to open your business the next day so that you can trade your way out of a loss. You don’t want to end up blowing up your account because you wanted to quickly recoup your losses on the next trade.
Doubling down on trade also goes directly against trading small to spread your risk across many trades. Each trade is an independent event and can either be a winner or a loser. You don’t know what the outcome will be when you initiate the trade, so doubling down is overall a bad idea. Hope and prayer is not a good trading strategy.
17. For earnings trades, wait until the day before
Companies release quarterly earnings reports that tell the public how well or poorly the company performed for the past quarter. Before the event, a lot of uncertainty in the company’s stock because the stock price can dramatically swing in one direction or another based on the financial performance of the company.
However, due to the heightened uncertainty, there is an opportunity for options sellers because of the expensive option premium. When entering into an earnings trade, it is optimal to initiate the trade as close in time to the event as possible so that we can center our trades around the stock price.
If instead, you place an earnings trade a week or a month before, there is a lot of time for the stock price to fluctuate before the actual earnings event occurs. This could lead you to too much risk on the trade.
18. Close your trades before expiration
Options are decaying assets that eventually expire. However, we rarely hold our trades into expiration. We are almost always out of our options positions around 21 days until expiration.
You may think that holding your positions into expiration is beneficial because time decay exponentially accelerates towards expiration so you would be able to profit faster. However, as expiration approaches, swings in the option price will become exaggerated as gamma increases. This increase in option price swings is called gamma risk.
In the trading strategies that we employ, the increased time decay is not worth the increased gamma risk.
19. Don’t sell options that are too cheap
Selling options too cheap gives you an unfavorable risk/reward profile. When you sell cheap options, you end up with more risk than reward.
Additionally, cheap options are more susceptible to vega risk. As options sellers, we want the price of the option contract to go lower. However, if they are already low, there is little room for profit. The risk-reward turns in favor of options prices increasing, which is bad for options sellers. This is how vega risk works – the risk that the implied volatility will increase, increasing the price of the option.
As options sellers, we want to sell what is expensive and buy what is cheap.
20. Ladder trades over time to spread your risk
One way to diversify your risk is by laddering your trades over time.
Let’s say you trade 3 contracts on your average trade. Instead of trading all 3 contracts in the same expiration cycle, you can trade 3 different expiration cycles, or laddering out in time.
When you ladder your positions, you are diversifying your risk. This is because all of the options Greeks behave differently across time. The further out in time you go, you have less time decay, but your delta risk is also diminished.
21. Keep some cash on the sidelines
You never want to invest 100% of your account into the market, doing so only disadvantages you by adding unneeded risk. Here are some reasons why you want to keep some cash on hand:
- Adjustments – not all trades are going to be winning trades. In fact, 30% of our trades will be losing trades. However, we have strategies to defend losing positions call adjusting or rolling. This type of strategy requires additional cash in your account to properly execute this strategy.
- Margin expansion – Margin is the amount of money that the brokerage firm sets aside from your account to initiate an options position. Margin is often a fraction of the total value of the options position, giving you leverage. However, during times of volatility and uncertainty, the number can increase. If you have an existing position tying up $300 in the margin, but volatility increases, then your margin might increase to $500. You would need an extra $200 in your account to hold that position.
- Losses – losses do occur in options trading because there is a real risk. There should always be enough cash in your account to absorb those losses so that you can hold on to your positions. You don’t want to be in a situation where you have to liquidate a position just because you had losses in a separate position.
- New opportunities – new trading opportunities always arise in the market. You want to have enough cash in your account to put new positions on.
- Limit potential profit in exchange for a higher probability of profit
Our trading philosophy focuses on exchanging unlimited profit potential for a higher probability of profit.
Everything in trading has a trade-off. The unlimited profit comes at the expense of a low probability of profit. Give up some profit potential, and you gain a higher probability of profit.
You simply cannot be consistently profitable if you only see profits of less than 50% of the time. This is a type of situation where you need to consistently hit home-runs to become profitable. However, if you see a profit, even if it is a smaller amount, more consistently, then you can become profitable. It is a lot easier to consistently hit singles than home runs.
Options Trading Hacks
22. Use beta weighted delta to judge your portfolio risk
Beta weighting delta allows you to compare apples to apples. Deltas in your Apple position means a different thing from your deltas in a Wal-Mart position. Beta weighting allows you to convert your Apple and Wal-Mart deltas into something comparable, typically SPY or the S&P 500.
By using portfolio beta weighted delta, you can accurately gauge your overall portfolio risk. If your portfolio is leaning too far in one direction (bullish or bearish) you now have the information to add offsetting trades to reduce your overall directional risk.
23. Estimating Probability of Profit on Options Spreads
Iron condors and credit spreads are two defined risk short premium strategies.
These strategies involve both selling closer to the money option and buying a further out of the money option. The dollar value difference between the two strike prices is the width of the spread.
Let’s say the stock price is $50 and you sell a $47 put and buy a $45 put. The difference between the strike prices is $2. Our pricing criteria require us to collect ⅓ the width of the spread, or $0.66 in this example.
One back-of-the-envelope method of calculating the probability of profit is to compare the credit collection to the width of the spread. In our example, we collected $0.66 and the width of the spread is $2.
If you take the ratio of the two ($0.66 by $2), you end up with 33%. You can then take 100% minus the ratio (33%) to arrive at your probability of profit, or 67% in this example.
24. Instead of buying stocks at the market price, sell puts to buy at a discount
Typically, if traders want to buy stocks, they would do so by buying shares at the current market price. We would never do this because it only has a 50/50 odds of making any money. Instead, we sell put options.
By selling put options, you are saying that you are willing to buy the stock at the strike price. For taking on that obligation, you receive a premium or some cash upfront. Your profit potential in this strategy is limited to the premium collected. This strategy has upwards of a 70% probability of profit.
If the stock goes up or sideways, you get to keep the entire premium collected. If the stock goes lower, you buy the stock at the strike price, which is almost always at a discount to where the stock was trading when you first initiated the position.
25. Place your orders at mid-priced – between the bid and ask price
When you read an option pricing table, there are always two prices for any particular option contract – the bid price and the asking price.
The bid price is the highest price someone is willing to buy options from you. The asking price is the lowest price someone is willing to sell options to you. However, orders typically get filled somewhere in between the two prices.
When we place our options orders, we typically go in at mid-price to get a fair price on our positions. As a retail trader, you never will be able to buy on the bid price or sell on the asking price. That is the job of the market maker because they make money off the bid-ask spread.
26. Don’t use market orders or stop-loss orders
Market orders are a type of order that you give to your broker to fill you at the next price, no matter what the price is.
At any given point in time, there could be thousands of people lined up with an order to transact a stock or option. However, they are not all wanting to transact at the same price.
With a market order, you are allowing your broker to fill your trade at whatever price someone is willing to give you. This is often not a fair price and using market orders is a great way to get ripped off.
A stop-loss order is a market order in disguise. A stop-loss order is a type of order that converts into a market order when a price threshold is reached to prevent further losses on a trade. For the same reason that market orders are bad, stop-loss orders are equally bad.
Instead, only use limit orders. Limit orders allow you to control what price your transactions are filled. Limit orders instruct your broker to fill your trade at your price or better. This way you know you won’t get ripped off on your trade fills
27. Use Good-Till-Cancel orders to close your trades automatically
You don’t have to be in front of your trading platform all day long to be a successful options trader. Good-till-cancel (GTC) orders allow you to automate part of the trading process by allowing you to close profitable positions for a winner, even if you are not at your trading platform to manually enter the trade in yourself.
Good-till-cancel orders tell your broker to keep your order in existence until you cancel the order or the order gets filled.
What we do is set a GTC to close a position once we reach a certain profit threshold. Using this technique, we can manage our winning trades even if we are not in front of our trading platform.
28. To see if you have dividend risk, check the price of the corresponding put
Any short in-the-money call is at risk is exercise if the extrinsic value of the call option is less than the dividend payment.
A quick way of checking this is looking at the price of the corresponding put. Let’s say you are short a $50 call when the stock price is currently $60. The call is in-the-money by $10. To see if you are at risk of a dividend, you would check the price of the corresponding put, of the $50 put in the example. If the price of the $50 put is less than the dividend amount, you are at risk of exercise.
29. To reduce your used buying power on undefined risk trades, buy cheap wings
Undefined risk strategies can hold a large amount of money aside in margin. Margin is the amount of money that the broker sets aside from your account for putting on the trade. This amount is typically 20% of the stock price times 100.
To reduce this amount, you can buy cheap wings. This means going out and buying cheap out-of-the-money options to offset the risk of the options you are short. By buying wings, you are giving up some profit potential, but you can dramatically cut down the necessary amount of money to put on the trade.
30. To make undefined risk trades IRA compatible, buy cheap wings
Undefined risk options strategies are often allowed in an IRA account, especially short calls. Short put options are allowed but must be cash-secured making it capital intensive.
To make short calls and puts allowable in an IRA, you can buy cheap wings, similar to the previous point. By buying cheap wings are you giving up some profit potential to make the trade allowable in an IRA account. This also helps to reduce the necessary capital required to put on the position.
31. Use the Greeks to measure risk
The Greeks measure the sensitivity of the price of an option to the various factors that go into the option pricing model. The Greeks can be very powerful for measuring their position level and portfolio level risk. Here are three of the most important Greeks that you will encounter the most:
- Delta – Delta measures the change of the option price for every $1 change in the stock price. This is your directional stock price risk. So if you see that your delta number is too large in magnitude, then you can use that information to initiate trades that offset that directional risk.
- Theta – Theta measures the change of the option price for every day that passes. This is the time decay component of an option. It is always important to make sure you have positive theta, meaning you are making money as time passes. If you see any negative theta in your options portfolio, that is something you may want to check out.
- Vega – Vega measures the change of the option price for every one-point change in implied volatility. This is your risk relative to changes in implied volatility. If you have too much vega in one direction or another, you may want to add offsetting positions so that your overall vega risk is not too concentrated.
- Use a watchlist and sort by IVR to find underlying to trade
One of the ways we use to scan for trading opportunities is through implied volatility rank (IVR).
Any good trading platform will display this metric. IVR measures where implied volatility currently sits relative to where it has been for the past year. If IV is currently 15, but the range for the past year was between 10 and 20, the current IVR is 50%.
This is useful information because now we know that implied volatility is high relative to where it has been in the past year. As option sellers, we only want to sell options when options premium is expensive, or when implied volatility is elevated. IVR is a metric to help us gauge the expensiveness of an option.
On the trading platform, we can sort our watchlist by IVR to find optimal trading opportunities.
32. Use cheap commission brokers like Webull
Trading commissions can quickly eat up your trading profits if you are trading at an expensive brokerage firm.
Webull is the leading brokerage firm for options traders. Its trading commissions for options trades are $0 per contract to open and $0 to close a trade. This is almost a 100% discount to the other major options trading brokerage firms.
On top of a killer commission structure, the trading platform is state of the art. It is very fast and intuitive, perfect for the active options trader who needs a customer-friendly way of entering options orders and analyzing current positions.
33. Use text/email alerts to notify you
Nobody can sit in front of the trading platform all day. We actually encourage you to step away from your trading platform. This will reduce the number of emotional trading decisions you made as you watch every tick of the market.
Instead, we suggest setting up alerts. Most brokerage platforms will allow you to set email or text alerts for almost any criteria: when the stock price reaches a certain level, when the option delta reaches a certain level, when the implied volatility rank reaches a certain level. Whatever metrics you use to set up a trade, you can set up an alert. This way you can stay up to date with the market without having to be in front of your screen all day.
34. Use inverse ETFs if you cannot short stock in your account
In some trading accounts, like IRAs, shorting a stock is not allowed due to account restrictions. However, there are inverse ETFs that you can buy, which acts just like shorting the stock.
Inverse ETFs are assets that move inversely to the underlying asset. For example, QQQ is an ETF representing the NASDAQ 100, or 100 of the largest companies in the NASDAQ. If the underlying stocks were to go higher, QQQ would also go higher. However, PSQ is an inverse ETF for the NASDAQ. This means that if QQQ were to go higher, PSQ would go lower because of the inverse relationship.
There may be cases when you want to short an underlying, but are not allowed to due to account restrictions. These inverse ETFs are great tools to gain that market exposure in a way that is allowable in your account type.
35. Prep your portfolio for vacation
When you are about to go on an extended leave from your trading platform, there are a few key areas that you would want to check to keep peace of mind while away.
- Close winning or break-even positions
- Close positions in high beta stocks
- Roll out to a further-out expiration cycle to reduce delta risk
- Buy cheap wings to define your risk
36. Don’t fall into the gambler’s fallacy
In options trading, the gambler’s fallacy is believing that after a large stretch of up days in the market, that the next few days have to go lower to compensate. However, this is a fallacy and is simply not the case in reality.
This is the exact same thinking that after flipping a coin and getting heads 5 times, that the next coin toss has to be tails. Coin flips are a 50/50 bet and even if the previous 5 flips resulted in heads, the next toss also has a 50/50 odds of heads or tails.
The same occurs in the stock market. Understand that the probability that the market goes up or down is 50/50 even if the prior 5 days stocks went up. This will save you headaches and frustration.
37. Don’t try to predict the stock direction
Directional trades have low probabilities of success because you will only be right 50% of the time. This is not how you achieve consistent trading profits.
Instead, we like to give up unlimited profit potential for a higher probability of success. These trading strategies often involve selling options and reducing cost basis. By doing so, we take advantage of time decay (which is given as time passes).
This is where your trading consistency comes from. Additionally, these high probability trading strategies take advantage of the overstatement of implied volatility. This is where our edge in options trading comes from.
38. Learn by doing
One of the best ways of learning options trading is by doing.
This does not mean go out and risk all your money. What this does mean is put a small trade on, risking less than $100 on your first trade. See in practice how the different Greeks work and how the different factors into the option pricing model affect your options position.
These are all valuable experiences you gain only through doing.
There will be some growing pains associated with your first trades. There will be new situations that you haven’t encountered before. There will be things that you see that go against your prior intuition.
However, excelling through this stage will lead you to be a better-prepared trader.
39. Learn one thing at a time
There is a lot to learn in options trading!
It is an intellectual challenge. From Greeks to strategies, to probabilities. However, don’t burn out by trying to learn everything at once. Learn one topic at a time and master it.
Here at Financetasy, we strive to provide leading options education for the beginner options trader so that you can progress on your journey to becoming a professional options trader.
Learning options trading is just like anything else in life. You learn one bit at a time. With some perseverance and commitment, you soon will be trading away rewarded for your hard work.
40. Treat options trading like a business
Options trading is a business and should be treated as such.
You should create a trading plan and adhere to it. You should create rules for yourself so that you can make objective, business sound decisions. This will help you to prevent making subjective and emotional trading decisions and keep you accountable.
41. Have patience
Options trading takes time to become successful.
This is not a get rich quick scheme. It takes time and dedication to learn all the concepts and put them into practice.
You have to be patient with your losing trades. There is always a chance that your losing trades will eventually become winners if you give them time.
Additionally, there will be times when you have a string of losing trades. You may be discouraged, but you have to understand the probabilities and have the patience for things to normalize and for the probabilities to eventually work in your favor.
42. Start trading with at least $2000
For margin accounts, you can start options trading with as little as $2,000.
This rule is determined by FINRA, which is a government-sponsored firm that creates regulations for the financial industry. A margin account allows leverage and buying and selling of options, which is fundamental to the options strategies we use.
$2,000 is certainly enough money to get started in options trading.
You can put on options trading strategies that risk less than $50 on a trade. You definitely aren’t going to double your account, but it will give you real trading experience before you start risking larger amounts of money.
Think of it as your education money. You are investing time into learning a new skill, which will payoff multiples in the future.
43. Don’t equate paper trading with real money trading
Paper trading is trading in a brokerage account with fake or virtual money. This platform can be a great learning tool for developing an understanding of the actual mechanics of options trading like entering in orders, seeing how positions are affected by the different inputs into the option pricing model, and testing out the platform.
Although a great tool for learning, paper trading is not equivalent to real money trading.
When you put your first trade on using real money, many emotions will begin swirling around in your mind. You actually have to begin making sound trading decisions for yourself. This is a necessary growing pain as you grow into a professional options trader. It is not easy as you transition from education to paper trading to real money trading. However, it is worth the pains and will pay dividends into the future.
44. Be consistent and persistent
Options trading is all about consistency and persistency.
As options sellers, we have an inherent edge in probabilities over the traditional stock trader and can create winning trades upwards of 70% of the time. However, that distribution of winning versus losing trades is not as simple as 7 winners and then 3 losers.
In some cases, we can hit a streak of losing trades due to random chance.
Think of it as flipping a coin 5 times and getting heads all five times.
These are challenging times and when we begin to question whether our trading skills actually work.
However, we have the math to support our trading decisions. Even if you hit a streak of losing trades, you have to stay the course and remain consistent in your trading. You just don’t know when the next string of winning trades will occur.
However, with a large number of occurrences and consistency in your trading, you will see the theoretical probabilities play out.
45. Don’t follow the shiny object
Newer trades often have the “shiny object syndrome”.
This is when they chase after the next greatest indicator or trading strategy in hopes of finding the end all be all trading strategy. However, the truth is that there is no one trading strategy is perfect. Each has its own flaws, even selling high probabilities options strategies.
Instead, you have to pick one system and stay consistent in your trading. With the strategies that we trade, it is very easy to stay consistent because we have cold hard math and probabilities to support our trading decisions. Even if we have a string of losing trades, we don’t give up and look for the next best thing. Stay the course and you will see success.
46. Accept uncertainty – nobody knows anything
Nobody knows where the price of a stock will go in the future. It is a random, unpredictable bet.
There may be people who seem like they can predict the next stock market move. However, they are outliers. You only hear the success stories, but never hear about the people who lose money making it seem like everyone can predict the stock market.
Think about it this way, let’s say 1000 people are flipping a fair coin. You would expect the majority of the 1000 people resulting in 50% heads and 50% tails. However, out of the group of 1000, you might reasonably expect one or two people who flipped all heads or all tails.
This is the same as a stock market guru successfully predicting a string of stocks. However, this does not mean that they know more than you do. Nobody knows anything so accept the uncertainty of the next stock price move.
47. Set a daily routine
A daily routine is important to develop as a trader. Here are a few key reasons why:
- Maintain a consistent schedule helps to keep your decision-making process consistent
- Daily routines help to make objective, sound trading decisions
- Daily routines help to treat options trading as a business
- Options trading is not a get rich quick scheme
Options trading is a getting risk slowly scheme.
After all, if it were an easy get rich quick scheme, everyone would do it. Options trading is a skill that requires patience and dedication. It takes time to build a solid educational foundation before really understanding the nuances of options trading.
From there, you have to consistently play the game of options trading day in and day out to realize the theoretical probabilities of success.
Through hard work and dedication, you will be rewarded with a skill that you can never un-learn. This will pay you multiples into the future.
Bonus Options Trading Tips
48. Pairs trading
Sometimes when there is not a lot going on in the markets, we resort to pairs trading.
Pairs trading is simply trading the difference between two correlated assets. For example, S&P 500 versus NASDAQ, or Treasury notes vs Treasury bonds, Wal-Mart versus Target.
Pairs trading adds a level of diversification to your trading portfolio. These types of trades are not outward directional bets on the price of an asset. Rather, they are trades that take advantage of historical extremes in the divergence or convergence between two related assets.
49. Robo advisors are not the future
There is a new trend in the financial industry with Robo advisors. They claim that after answering a few questions, the robot can suggest your optimal passive stock portfolio allocation of stocks. However, this type of technology is not the future.
The stock market is dynamic and unpredictable. It is hard to believe that some computer algorithm has figured it all out. In fact, a human has to program the robot in the first place.
Looking at the performance of these Robo advisors after fees, they are no better than just randomly picking funds to invest.
There is nothing in life that you can be successful in while being passive about it. This is exactly what Robo advisors do. Anything worth achieving takes effort and dedication to move into a better position. This is true even in the stock market.
50. Contribute to IRA accounts for tax benefits
IRA accounts are a type of trading account that gives certain tax benefits.
A traditional IRA account allows you to deposit money pre-tax, avoiding tax today. However, the withdrawals are taxed in the future. The other type of IRA is a Roth IRA. In this type of account, your deposits into the account are tax, but the withdrawals are tax-free.
These types of accounts provide tremendous tax benefits allowing you to compound your account tax-free. That difference in taxes can lead to a 30% increase in gains over decades of compounding using these types of accounts.
Regardless of your experience level in options trading, there are several reasons you can benefit from focusing on these options trading tips.
Options trading can be very lucrative and pay off multiple if you learn how to trade with the right strategies and staying consistent in what you do. Many of the best options traders follow the tips listed above.
Now it’s your turn to improve your options trading to see results.
So what tips do you have for options traders? If we’ve missed an awesome trading idea, let us know in the comments below.