In today’s post I will concentrate on some significant thoughts for the newbie option traders. Options trading get so much press these days that it’s tough for newbie traders to kick start trading options. I think there is a natural evolution to the whole process and it can’t be hurried. Options can’t be learnt overnight and traded. It requires discipline and perseverance. If you think, you can become rich overnight by trading options, you are wrong. Options are not a get rich plan that you can jump into. You may ask me if people make a lot of money trading options. Yes, and they also lose a lot of money. The risk and reward is superior and every blunder is exaggerated. Never jump into trading options without understanding them. You may be blown-up in case if you make blunder. Don’t be frightened, once you learn options you will never go back to trading anything else.
1. Read, read, read. I would request you to start with “The Bible of Options Strategies” by Guy Cohen, The Option Trader Handbook: Strategies and Trade Adjustments by George Jabbour & Phillip Budwick and The Volatility Edge in Options Trading by Jeff Augen. Learn all that you can about option trading. Larry McMillan is the best known author for option trading books.
2. Trade options as an addition of your portfolio. Options give you the flexibility to construct risk and reward. Don’t do any speculative trade. Use them to hedge and generate income.
3. Be suitably capitalized. If you do not have Rs. 50,000 of speculative risk capital, you should not be trading options. Options are not a recently discovered vehicle to financial freedom. They are a complex, dynamic product that will strip you of everything the second you let your guard down and can give steady income in any market if used appropriately.
4. Set reasonable expectations. If I make 25% a year (in any market, bull-bear or sideways) I’ve met my target. You will hear people talk about making 20% per month, those are very high –risk trades which can wipe one year again in one month.
5. Be ready to lose some money. After 8 years I still have a few losing trades. Managing risk should be giving top priority and making money second priority.
6. Spread out your money and never allocate more than 10% to any one trade. When possible, scale into positions.
7. Never short call or put without any hedge.
Narendar Rathod – Chief Advisor
Assured Gain | Trade Wisely and Relax