Recently, I have been answering
options trading questions posted by options trading beginners at my website and
it amazes me to find that MANY of these questions surround a single theme. Some
of these questions are like:
“I just bought a call option, how
do I take profit?”
“I bought a put option at XXX
strike price, so what does it mean for me to hold this put option?”
“I think I made some money on my
call options but how is profits calculated in options trading?”
Options trading beginners asking
questions like that are making the biggest options trading mistake ever made by
beginners and that is… Buying options without knowing completely what options
is in the first place!
It never fails to amaze me how
many people are buying options without first knowing what options are and what
they do in the first place! Incredible but true! This is the reason why so many
beginners lose their shirts in options trading. Stock options, as a leverage
instrument, is merciless when it comes to losses especially when you don’t know
what you are doing and that has resulted directly in many horror stories
surrounding options trading.
Would you drive a car without
knowing what a brake pedal does? Would you operate a new machine without
knowing what all the buttons does? Why then would you buy options when you don’t
know what everything in options trading mean?
After pondering hard on this
question of why beginners are buying options when they don’t even understand
what options does in the first place, I arrived at the conclusion that too many
beginners think buying options is as simple as buying stocks. In stock trading,
all you have to do is to choose your favorite stock and then buy it. That’s all
you need to do. However, in options trading, there are options of various
strike prices as well as expiration months, so, how are you to know which
single option to buy in order to fulfill your trading objective if you don’t understand
the difference between strike prices and the effects of different expiration
months?
Amazingly, a lot of beginners
today continue to make this single most deadly mistake and then when they get
stuck in a trade, they try to find “quick fixes” on the internet, which of
course, doesn’t exist. Perhaps we are now living in a world of quick
information and a spirit of adventure and trial and error such that many people
think that they can learn options trading the same trial and error way. Of
course you can but it will eventually lead you back on the road to learning
about what options is completely and the difference is that you would have paid
thousands of dollars in school fees to the market. Most deadly of all is that
the losses would have affected your trading confidence and cast a shadow of
fear in your heart, leading to emotional decisions in your future trading. Yes,
it can break your options trading for life!
In conclusion, there is a lot to
learn about options and small changes like buying a different strike price can
lead to very big end effects and if you don’t know what all these does in the
first place, how are you to optimize your profits and minimize your losses? In
the end, all options traders who took the easy way out (of course I would
regard that as the hard way out) of simply taking the plunge and learning from
the experience would still come back to getting a proper understanding of
options. I recommend all of you who are contemplating options trading as part
of your investment arsenal to learn completely what options is and what it does
BEFORE getting into your first trade. You can get such options trading
education for free at http://optiontradingpedia.com without having to pay for
weekend seminars costing thousands of dollars.
