By Mark Louie
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Options can be a menacing trading practice. Once you think you have it figured out, it shifts. Like any investment, there’s going to be some sort of gamble. Although viewed by bitter traders as confusing, risky and unprofitable at times, options can produce monstrous gains that can far outweigh the risks if played right.
Trading options is all based on anticipation. Yet with the volatility of the market, trading can be very frustrating with the market being unpredictable. There are several strategies and tips that you could practice that will increase your odds…
Here are 10 helpful tips that will contribute to minimizing risk and pull in huge profits when trading options:
10) Develop a game plan
How practical is this statement in life? You must always have a game plan when trading or investing. Otherwise, you’ll most likely trade irrationally and insensible and end up losing more than you had hoped. Developing a plan and strategy will have better odds than trading randomly. This should always be your first step to investing.
9) Select a good broker
Even with today’s easy access to a variety of resources, trading options are still very difficult to do on your own. Unless you’re a pro at trading, it would be to your best interest to select a brokerage firm for guidance. There is a plethora of different services out there offering different products. Shop around and learn their tract records. Make sure you choose one that’s compatible with your objectives and personal requirements. Remember, these are the people investing your money. Also, be aware of commission fees.
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Evaluate yourself
What are you trying to accomplish? How much money do you hope to make? How much can you take in losses before it affects your life? These are simple questions you should ask yourself when deciding to trade. Evaluating yourself will help you reduce of risk as well as help you plan your trading.
7) Know and understand the market
There are so many strategies and tactics when buying or selling options that you could trade in all market trends. Whether the market is bullish, bearish, or neutral, understand the trends and correlate it to your trading strategies.
Different markets will require different trading strategies. For example, you’re going to want to buy calls in a bullish market and sell calls in a bearish market.
News and press releases will have an impact on a stock price. Don’t buy from what sources are saying despite if they’re true. Chances are you’ll get in too late. Wait for a favorable price.
6) Separate and dilute your capital
There’s no other word more commonly used when preventing risk than diversification. This practice is so widely used in all investing practices. Like stocks, buy in several different sectors and equities to minimize risk.
Never trade with money needed for future obligations. Have a separate portion of your capital for trading options. The worst thing you would want is to lose your mortgage payment or retirement savings on one single sour trade.
5) Don’t get out early
You may have just had a few consecutive losses on several trades and you now have the mindset that all your trades will continue to negatively streak. Initially, you panic and tell yourself to get out to minimize your losses. That might be the worse thing you could do. If you get out too early, you could lose out on potential huge gains. In options, huge gains are what overcompensate any losses.
4) Don’t hold too long
Pay attention to the expiration date. Time value is one of the most important factors when trading options. Having the entire option expire and losing its value would be bad. Understand that options decay over time. If you feel it’s time to sell, sell. It’s better to take a small loss than losing everything.
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3) Secure your gains
Losing money right after you make it is a horrible feeling. With the volatility of the market, it’s easy to see a stock jump one week and then drop the next. If you don’t decide to sell after a stock is up in anticipation that it will continue to increase, a simple way to secure your gains is by setting up a trailing stop. A trailing stop is a stop whose price you raise as your profits grow. This will help you lock in any gains you make.
2) Establish a break-even point
A break-even point is the price at which the underlying instrument must shift by the expiration date, to produce an intrinsic value equal to the price you paid when you purchased the option. Defining a break-even point will ultimately help you tell whether the stock is worth selling or buying.
To find the break-even point, use the strike price and premium. If you’re buying a call, add the premium to the exercise price. If you’re buying a put, subtract the premium to the strike price. For example, if you were to buy a $40 put contract on Company XYZ for 5 1/2, the break-even point would be $34.50.
1) Research
This is a no brainer. Researching is the most useful and important thing to do when trading in anything. Pay attention to market trends. The best way to beat the market is to know the market. Great research is the key to consistent success in the market. Outside sources like your broker, news, TV etc. are great ways for information, but it all comes down to you. Your own personal information is more valuable than any other resource.
Options can be confusing and frustrating at times. Yet options can produce enormous gains. The collaboration of these 10 highlighted tips will help you increase your chances of making profits while minimizing risk when trading options.
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