How much money do I need to start?

One of the beautiful things about options trading is it’s one of the few businesses that you can take for a free test drive to see if you can be successful at it. By trading in a simulator you can start your business with no money. Obviously you won’t be earning anything either, but you will be gaining valuable knowledge. You can find a simulator at CBOE.com. After you’ve traded in the simulator for a few months and become consistently profitable you can start with as little as $2,000.

Finding a broker

The first step in getting started in an options business is finding a broker. There are many (excuse the pun) options available, a few of the good ones include, OptionsXpress, TradeStation and Interactive Brokers. These are all members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which are two organizations that protect you against fraud from financial brokers.

Putting the Odds in your favor

While this isn’t a comprehensive list there are a few things that you can do to stack the odds in your favor when dealing in stock options. First of all rather than buying puts and calls you can use credit spreads. This method of selling a higher priced option and purchasing a lower priced option alone will stack the odds enormously in your favor simply because this method can allow you to make money whether the markets go up, down or sideways. As a matter of fact using this method can allow you to win as much as 80-90% of the time, which is why professional traders use this type of trade to generate consistent income. The next thing you want to do is a bit of technical analysis and look at the S&P stock index. If the index is moving above it’s 200 day moving average you generally want to be purchasing stocks or using bull put credit spreads. If the index is moving below it’s 200 day moving average you should short sell stocks or use bear call spreads. How much can I earn? This can fluctuate depending on market conditions but by using credit spreads you can make anywhere from 5-20% a month. So with $10,000 you can generate anywhere from $500-$2000 in extra income a month.

Reducing Your Risk

1.Start off by trading in a simulator at CBOE.com

2.Always use a stop loss or have your positions hedged.

3.Never trade with money that you need to pay for you day to day expenses with such as rent and bills. Nervous money always loses.

If you’d like to find out more about options trading and credit spreads click on the link in the resource box below and sign up for a free 10 part course.

First, analyze the most recent price action. What are prices doing? Is there a definite pattern the you can detect? Where have prices been? Have they already run the stops close by? If you are daytrading, has there been sufficient volume during  the hours you like to trade?

Second, do you see any confirmation of your intentions in the recent price action. E.g. You are intending to go long and the last bar on the chart made a key reversal to the downside.  This would not be conducive to going long.

Third, apply the current information to whatever analysis you do. Faith has no place in the market, neither has wishing, praying or hoping. realistic analysis of price action and correct trade execution and management are the only things that will save you from the sting of an unsuccessful trade. If you’re going to pray, do it before you ever enter an order into the market.  Then make sure your prayer is the right one.  Don’t pray for prices to go up, because someone else may be praying for prices to go down. Pray instead for wisdom, guidance and insight.  In trading you, any alone are responsible for knowing what you are doing before you get into the markets. You must do more than believe in your abilities, you must effectively use them to produce the results you want. Successful trading is built on experience, which is in large part knowledge of what works and what does not work. Mistakes teach lessons only to students wanting to learn. If you are afraid of making mistakes, how are you going to learn? A key to success is to not repeat the mistakes, and correct the thoughts or trading methods that caused them.

There are any number of reasons why a trader hesitates before a trade.  The main one is lack of planning.  Without a plan, there is no degree of confidence a trade will be successful, it’s all wishful thinking. Unless they are outright gamblers, traders usually have a strong need to protect their assets and avoid risk. This is especially true for beginning traders. It can take a long time to build up sufficient capital for serious trading. By that I mean sufficient capital to be able to trade for a living. It is quite understandable to fear losing all or part of your initial capital. Beginners tend to seek absolute certainty before taking a risk, and gaining true confidence in you ability to trade successfully can take time. Unscrupulous marketers of mechanical trading systems and methods take advantage of the beginners fears and lack of confidence by advertising “sure-fire” “magic” ways to trade, instead of revealing the truth about the difficulties in becoming a consistently successful trader.

When it comes to short term trading, there isn’t very much time for long deliberations. Market conditions are in continuous flux. Decisions need to be made relatively quickly, and if one waits too long to execute a trade, he or she may miss a significant opportunity. The reasons for hesitation are everywhere, and traders must be aware of them, and create a plan to prevent them.  Let’s look at a few of the things that cause traders to hesitate:

The complex charting software available these days tends to increase hesitation.  Traders think that the more confirmation they can get from indicators, the more certain they can be that a trade will be successful.  However, all indicators lag the market. The notion that an indicator can somehow predict what will happen once a trade is entered is nothing more than wishful thinking. An indicator may give some degree of confidence about entering a trade, but the indicator cannot trade the trade, only the trader can do that. Once a trade is entered, it becomes entirely a process of management. It’s tempting to look at as many indicators and signals as possible. Doing so, however, can be very time consuming. That’s why seasoned traders advise looking at only a few if any key indicators.

Hesitation is often related to a lack of confidence in the trader’s trading strategy or trading ability. There are numerous reasons for such lack of confidence. Some of the reasons are shallow and mostly on the surface, like being distracted by watching financial TV while trading.  Other reasons are more deep-seated, and actually reflect psychological problems dating all the way back to early childhood.  A trader may not believe that his or her trading plan is adequately developed.  Nevertheless, they are determined to trade, so they muster up their courage and finally jump into a trade almost guaranteeing that the outcome will be a matter of pure chance.  Some traders may question their trading plan because they know that they did not spend enough time preparing it. Sometimes hesitation is intuitive, warning the trader to avoid the trade. All too often, traders are not tuned into their own intuitive feelings.  In the case of intuition, hesitation can act as a motivator. If the trader feels the hesitation is because of lack of adequate preparation, then that trader must learn to spend more time preparing for trades. By studying the markets a trader can come to see new higher probability setups, thereby reducing doubt and indecision, and in turn stop the hesitation because of more adequate preparation.

Hesitation sometimes reflects a deep desire to be right and a fear of being wrong. It has been our experience that many of the people who are attracted to trading fit into this category.  Great care must be taken by physicians, engineers, scientific types, and mathematicians, who seem to be the most prone to this type of hesitation. They are often perfectionists afraid to face their inadequacies. By putting off a decision, they don’t have to face their limitations, and can pretend they are better traders than they really are. If I had the time and space, I could give you dozens of examples of this kind of hesitation.  The perfectionist’s reality states that everything must be in order and follow rules.  They think strictly inside the box.  They want everything to be perfect, so they continually second guess and doubt themselves and what they are doing. They believe that they cannot cope with being wrong. This occurs in trading decisions as well as other life decisions. Extreme perfectionists often think that once they make a bad trade, it will be the start of a downward spiral and a complete blowout of their trading account.

Hesitation very often relates to low self-esteem or other deep-rooted psychological issues. We see these more times than we would like to.  Traders with low self-esteem usually lack confidence, not only in trading, but other areas of life. Beneath it all, they doubt their ability to trade, and hesitate making a trade until they the guilt of not doing so overcomes their fear.  At that point in time, they enter a trade out of pure compulsion driven by guilt.  This exposes them to a trade with no real plan to support it.  They become victims of pure chance.  We also find that traders who hesitate may have a conflict regarding their success. They can actually fear success.  They have been told by parents or others that they were no good, that they would never amount to anything, that they were “bad.” These people strive for success at one level of their consciousness, but at a deeper level, they secretly believe they cannot attain it, or do not deserve it.

Identifying, directly facing, and eventually eliminating a problem of hesitation is the only way to truly deal with it. Chronic hesitation will eventually destroy the confidence a trader needs for success. If the problem is not dealt with and the traders continues to hesitate, miss important market moves, and see his or her equity begin to dwindle, that trader runs the risk of becoming a phantom trader, a pretender, becoming convinced that the imaginary trades being made are real. If you are prone to hesitation, it’s vital that you deal with this problem early in your trading endeavors. Identify the reasons for it, confront the problem, and make changes as soon as possible. These are changes you have to make within yourself.  If you will truly engage in self-examination with the object of eliminating hesitation, you can trade become consistent and successful in trading profitably.

Humans are hard wired in life to succeed and by definition we measure success by successful achievements. When people try their hand at stock market trading they try use the same measurement and inevitably become stuck in a loop of jumping from system to system tweaking this and that and eventually giving up.

This brings us to what in my opinion is one of the principle causes for the 90%ers of Net-Losers-United which Holy Grailism. The average loser comes up with a good system, however irrespective of win rate all systems can and will go through strings of losses. What will the average spread better do when faced with the inevitable, a succession of trades going against them? They lose faith, dump their system, and go looking for a new one. Not everybody will agree with me on this, but I am firmly convinced that a good, robust system, a system that is aligned with how markets work, would have worked in the day and age of Jesse Livermore just as well as today. Reminiscences of a stock operator is what taught me trading, and that book is a hundred years old. I do not think that markets change, simply because humans don’t change, and humans are the ones that drive markets, be it discretionally or through computer models that humans wrote, it’s always a human at the end of the day that influences what happens. Markets just simply are not predictable… Why are markets not predictable? Because Markets are nothing else than the collective result of all their participants actions… Actions driven by hope, fear and greed, on what will happen next. There is no inner logic to markets, there is no system to markets, and there is no secret explanation to price development… Anything can happen at absolutely any time if somebody influential gets a brain fart and shares that with the media, or if a large enough order pushes a market in a direction opposed to what your clever analysis would have you believe should happen next… Markets are simply constantly being pushed to and fro by the diverging interests of all their participants, all following their own agenda. A market is nothing else than a conglomeration of huge numbers of participants all following totally different objectives… You have hedgers, you have speculators. You have fundamental traders, you have technical traders. You have scalpers, day traders, swing traders, position traders. You have participants that see the same price levels, yet for some the price is too high, for others it’s too low…etc Every participant in the markets has a different perceptive, different objectives, and different risk parameters. That is why the notion of predictable markets which follows some inner system is nonsense, and that’s why the search for the Holy Grail to unlock the hidden market secrets is a quest best left to the 90% of net losers. The market is composed not of an inner logic or system that is separate from its constituting participants, no, a market is nothing but the sum of its constituting participants, each of whom has his own agenda, doing his own thing. Anybody who honestly believes that markets do what technical analysis says they should do next should just watch Mr Soros buy 10 Billion Euros and see what happens to all their clever analysis.In fact you can generate a random chart of anything, and that chart will look exactly like a real chart of a real instrument! Anybody who honestly believes that a chart of a real instrument will look different than its random counterpart has just never looked at a random chart. BUT, where academia gets it wrong, is that randomness of markets absolutely does not mean you cannot profitably trade them. Random charts have tradeable trends just like all charts do. The real problem is that people like to believe that they are clever, and that they can, through their cleverness, analyse situations, come up with the correct answer, and solve problems. Ego dictates that people have a real need to believe that success is their very own achievement, while lack of success is usually attributed to circumstances beyond their control. Look, we know that trading has nothing to do with being right… Brett Steenbarger says ‘…As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability….’ Why do people still insist on wasting time, money and effort on solving problems that do not exist, on trying to outwit what cannot be outwitted, markets that are nothing else than the sum of all our actions ? There is no pattern that tells you what will happen next, BUT you do not need that to make more money than you can ever spend. Stop chasing the holy grail, stop believing that if you just keep on studying markets you will one day be able to predict what happens next, you do not need to feel that you understand price to get rich. Markets can go up, down or sideways, that is all they do. All you need to make a fortune is to do what any kid in kindergarten could do, grab a chart, eyeball where the path of least resistance is, jump on board, cut your losses when and as they occur, and otherwise ride that trend all the way until it bends. Trading is nothing than a probability game. You create your positive expectancy not through predicting markets. You create your net profitability through your preferred combination of risk / reward ratios and win rate, through either on average letting your winners run longer than your losers with a lower win rate, or by cashing in smaller winners than losers albeit with a higher win rate. That is all trading is, it’s not about being right, it’s about making money by understanding that it’s just a numbers game. Next time someone tells you they have a great new system that’s going to beat the markets just give Mr Soros a call and tell him to buy ten billion worth of EUR/USD while watching your friends pipe dream go up in smoke. Like Exile says, trading is simple, maybe not easy, but simple.KISS!

You might begin by subscribing to a good stock option newsletter that includes the latest tips and strategies for investors who engage in options trading. Such a newsletter will be vital for an investor when deciding the fate of his or her options.

You will find that many brokerage firms offer helpful publications and tips by email to help novice option traders sound advice and strategies. After all, brokerage firms profit when you are successful. There is also a wealth of information regarding options trading readily available in books at your public library and local bookstore. The most successful investors spend endless hours soaking up knowledge on topics regarding stocks and option trading.

In addition to the numerous books available at your local library and bookstore, many websites offer ebooks, newsletters, and publications dedicated to the subject of options trading – the Chicago Board of Options Exchange (www.cboe.com) is a great resource. You may also consider joining an investment club for even more guidance and help. These clubs typically provide members with stock option trading newsletters as well as options trading tips. You may also want to consider networking by joining an affiliation. It is important to arm yourself with as much information as possible if you are considering options trading as an investment strategy.

Options trading should never be viewed as a get rich quick scheme. As with anything else, it requires experience and knowledge to be successful. Therefore, it is advisable to gain as much knowledge as possible before even considering this avenue. Take advantage of electronic updates and newsletters for research and choosing the best options. However, you should keep a balanced perspective when utilizing this advice. Keeping all of these things in mind will definitely increase your chance at profitability with options trading.

Also, it is advisable to keep in mind that you should only invest your expendable finances since there are always risks associated with investing of any kind. You would not want to risk your retirement fund for investing. Be knowledgeable and sensible about your options trading strategies and you will increase your potential profits.

Option trading, in and of itself, is not inherently risky. Options are simply tools. Imagine a big dial labeled, Options. You turn the dial one way and your risk goes down (as do your potential rewards). You turn the dial the other way and your risk goes up (as do your rewards, either in the form of upfront cash, or in the form of potential profits). In short, you can use options (for the right price) to reduce your risk, and you can use options (if the price is right) to generate lucrative income or receive other compensation in exchange for taking on someone else’s risk.

Let’s look at some scenarios that show each side of the risk trade.

Using Options to Reduce Risk

There are various option trading strategies you can employ to reduce the risk to your stock holdings. The price you will have to pay may come in the form of an actual cash payout to purchase that protection, or it may involve exchanging some of your future potential profits in order to acquire that protection.

Here are two trades that will reduce your risk:

Using Options to be Compensated for Assuming Someone Else’s Risk

If you are willing to assume someone else’s risk you can be compensated–and sometimes quite handsomely–for your trouble. The compensation may take the form of sharing the capital gains on someone else’s stock, or it may simply take the form of a cash payment.

Here are two types of trades in which you are compensated to assume someone else’s risk:

Conclusion:

The option trade examples above are all relatively simple but they illustrate the true nature of stock options. Trafficking in options is essentially trafficking in risk. No matter how elaborate and complex an option trade becomes, the core equation of risk is still present.

Developing and maintaining an awareness of this reality of options is crucial to your own option trading success. Whether you’re looking to reduce your risk or to be compensated for assuming someone else’s, a conscious awareness of what’s really happening in any given options transaction is invaluable. Once you know what’s really at stake, you’re in a much better position to consciously look for ways to accomplish your objectives as efficiently as possible. The outsourcer of risk will seek to reduce risk as cheaply as possible, and the assumer of risk will seek the highest compensation for the risk assumed.