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Seven Steps to Learn Options Trading

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  • Seven Steps to Learn Options Trading

    How can you go about learning options trading? At first, the world of options looks complex and difficult. There is a lot of hype about how insanely profitable options trading is, and how ridiculously dangerous it is. The process is not that difficult, but you need to control your greed and be patient in order to succeed. Here are seven steps that will help you master the process:

    1. Learn the basic terms and concepts. Start with an understanding calls and puts and how they are traded. You shouldn't start trading yet, except on paper, but it does help to get the terminology under your belt. Understand when you would buy or sell, and whether you would use a call or a put. You will learn about terms called "Greeks", but they are not a cause for alarm. Get to know about the term "Delta" in the beginning, and also learn about time decay. You should become familiar with the term "volatility" and its influence, and you should understand terms like ITM, ATM and OTM for both calls and puts.

    2. Pick a basic, lower risk strategy. Once you have the key concepts under your belt, choose a strategy that will not expose you to too much risk, and ensure that you preserve your capital. Remember, the basic rule (before you get to thinking about profit) is "Don't Lose Money!". You might pick on something like credit spreads, covered calls or DITM options. Try the strategy in different ways, in different market conditions. Paper trade it for a month or two, and include some extreme trades in the process, until you are completely familiar with how it works, and where the dangers may lie.

    3. Read some good books. There are a few really good ones out there, and there are plenty of expensive books that will scare the living daylights out of you! Choose carefully what you read, and find out what (if anything) the author is selling through his book.

    4. Learn Just Enough Technical Analysis. You DO NOT need a doctorate in technical analysis in order to trade options. In fact, the more complex you get, the more danger you have of failing. For each strategy that you learn, make sure that you know exactly what aspects of technical analysis apply to that specific strategy. For example, if you are trading credit spreads, you need to know a very simple, two step method to identify a trend, and you should be able to identify lines of resistance and support. That's it! Any more, and you start making mistakes, because of the complexity, or will end up with analysis paralysis. The higher the risk of the trading strategy, the more analysis you need, but build into your trading plan the exact factors that you need to know, and stick with those.

    5. Paper Trade! It is really important, as you learn options trading, to do a lot of paper trading. Use this to try out some extreme examples, and some risky trades, so that you see for yourself what can go wrong.

    6. Get a grip on your greed! This is one of the big killers of option traders. Start with a strategy that gets you an average of 5-10% profit per month, and do it consistently, before you take on bigger, riskier strategies.

    7. Avoid Option Advisory Services. They are quick to take your money, but generally slow on performance. It is much better to learn for yourself how to do it, and then you can control what happens to your money.


    Article Source: http://EzineArticles.com/4726399
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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."


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