Option Trading Advice

Those of you searching for option trading advice are generally either fairly new to the options market, or are accomplished traders experiencing some problems with their active trades and so are hoping for a solution. If you are in the first category you are probably in search of some advice about how to start out options trading, what risks are involved and how to prevent them, the best way to trade confidently and still make regular profits. For those who are among the second category, there are ways to save or at least, salvage, failing trades, but this discussion must be left for another article.

So what is the best option trading advice for beginners?

The simple response is, to ensure that you first understand all there is to know about options trading, especially the concept of time decay, before you decide to risk any of your hard earned funds. Decide what kind of trader you want to be. Do you want to be a day-trader, a short term trader or a longer term trader who only wants to look at your positions to determine if you need to adjust them once daily and it has at least a monthly or longer strategy in place.

The next question you should ask is, what underlying financial instruments will you plan to link your options to? Stocks, commodities or foreign currencies? Whichever one you decide on, each of them have their own set of characteristics. Stocks can 'gap' overnight. Commodities can become very volatile. Currencies trade around the clock five days per week and are influenced by economic news items.

Remember also, that the shorter timeframes you intend to trade, the greater the stress and if you hold your positions overnight, the higher risk of losing trades endangering your account.

The Dangerous Way to Trade Options

In providing option trading advice, we would be remiss if we didn't bring to your attention the point that, like any business, there is a high risk and a safe method of doing it. If your intended strategy is to purely buy call or put options in an endeavor to anticipate short term market direction and profit from these moves in just a few days, you should appreciate that even though this carries a possible high reward profile which makes it attractive, there is also a much greater risk that the price moves against you so that your losses can quickly outweigh your profits. Many traders who attempt to forecast short term market direction have cleaned out whole trading accounts.

You might believe you have found an option trading system that works for this kind of strategy. But if you would like some real option trading advice here, you should ask yourself whether you have the emotional self discipline to accept stop losses and also stay in trades long enough to attain targeted profits. Do you have enough free time to be able to completely focus and act whenever the need arises? The high risk way of trading options often seems attractive to inexperienced traders mainly because of the simplicity of its approach and the confident prospect of making big profits. But even well seasoned traders find market prediction difficult, so watch out for systems that promise you the moon.

The Low Risk Way

Now this could be the most helpful option trading advice you might ever be given. If you understand the concept of time decay, make sure you discover ways to use this to your advantage. It's far better if you are on the short side of an option contract as opposed to long side, due to this feature of options. Taking positions with about a month or slightly more to expiry date and being on the selling side of option contracts gives you a distinct advantage.

Even so you should also add to this advantage, the art of adjustments. Even with the advantage of time decay on your side, the underlying price action can come close to breaking through your breakeven points before option expiry dates and this is where you need to know how to handle it. If you adjust your positions in the right way when this happens, you don't just save them from loss but ensure extra profits in the process.

In connection with the above strategy, you should look at trading indexes rather than individual stocks. The reason behind this, is that you prefer a smooth price movement to a volatile one. While a news item may unexpectedly impact the price of a particular stock it will not have much affect on the index to which that stock is related. An index is the aggregate of a class of stocks like the Dow Jones, the Russell 2000, the OEX, QQQQ or the S&P500 in the USA. Options are available on all these indexes.

Trading double calendar spreads and iron condors on indexes and knowing how to adjust your positions when necessary, is one of the best trading approaches I have encountered. My option trading advice to you is to at least familiarise yourself with these and enable yourself to trade with confidence.

By: Owen Trimball

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Owen has traded options for many years and writes for Options Trading Mastery, a popular site about the best Option Trading Strategies. Discover a wealth of information about options, including the popular iron condor