Where to start? This is often the question many beginners of option trading ask. I’ve listed here five tips that will set you on the correct path to profitable option trading.
1. Understand how options work and move. There are many free online resources that you can use to learn about options and how they work. It is fundamental that you understand they are derivatives of another product and how that underlying product’s price movement affects the movement of the options you’ve bought or sold.
A solid understanding of the exponential benefits and dangers of trading options is key.
2. Volatility. Understanding how volatility works and how it affects the pricing of your options is very important. Volatility is really the main driver of option pricing besides the options in the money premium and time premium. Entering and exiting a trade as well as choosing what strategy to use all revolves around your understanding of volatility.
3. Know your underlying product. Whether you’re buying or selling options on an index or a stock, it is imperative that you understand the underlying, how it moves and what news may be coming to affect its price movement. Study the stock or index for news that you feel will make it move hard in one direction or another or non-directionally. That requires an understanding of what the drivers of the stock’s pricing are.
4. Setting reasonable goals. Once you know the options and the underlying that you are trading it is important to set reasonable trading goals. How much money can I reasonably make? How much risk do I want to take ? How does this affect my overall account? These are all questions that you need to answer before you begin trading options strategies.
5. Have a plan. Nothing is more important in any kind of trading than having a good plan. When will I enter? When will I exit? Profit goals and adjustment plans. How will I manage it whether it goes for or against me are all fundamental components of a good plan.
At Sheridan mentoring, every day we work with traders to help them develop these skills. Please take all these tips and apply them to your options trading business.