At first, they’ll intrigue you, but you might rule them out as not for you.
Soon, there’ll be a second glance. Maybe you’ll read an article about covered calls and realize you can seriously maximize your investment income by writing a few. Covered calls — and using puts to hedge — tend to be the gateway drugs to more advanced options strategies. We have seen more than one trader or investor take this righteous path.
That said, if you don’t properly prepare and set yourself up for success, options can take you on a bad trip. In this article, we detail a few things you need as you get set to take the next steps trading options.
Sounds basic, but it’s not. You can’t go into any set of serious options trading strategies without an ample amount of cash.
Not only do you need cash to execute actual trades, but you should have sufficient equity in your margin account and just general liquidity to support your trades. As a basic example for illustration purposes, let’s say you write (sell) a put, which sets you up to buy a stock below its market price at the time you sold the put. If you are “put the stock” (meaning you have to buy it), you’ll want to ensure you have buying power to do so. Your brokerage will help you keep tabs on this, but it’s too easy to get into trouble selling naked (not secured by cash) options.
Patience and Time
We group these two because, without time, it’s extra difficult to be patient. And this ties back into having a (more than) comfortable cash position for life and your trading endeavors.
Any type of trading, particularly if you rely on it to make a living or fund meaningful goals such as retirement or buying a home, takes a significant commitment to get right. Learning the ropes of something as potentially complicated and nuanced as options trading is a process. You can’t expect proficiency, let alone success, overnight. You’re going to make mistakes (another reason why you should have a fair bit of cash). But that’s good because you’ll learn from them.
You’ll discover why you made the mistake, see it coming next time, not repeat it, and execute a winner rather than losing trade. It’s a beautiful thing to experience; however, you have to let it happen, remembering that it’s part of the process.
Respect the process. It’s easiest to do this if you have patience and time.
When I started to learn about options, I was in my early twenties, and there were limited online resources at that time. I ended up subscribing to Schaeffer’s Research Option Advisor which was an options trading service. It was mailed to me once a month and I paper traded the recommendations. Finally, I saved enough scratch to start swinging some options for real and at the time the extra $500-$1000 a month felt like I hit the lottery. Without my options subscriptions service, I would not have learned options to the extent I needed to. The service along with books I would read while sitting in Barnes & Noble and devour helped me become reasonably well-versed in options.
Find a situation like this. It might be signing up for a reputable options trading service, such as the one here at SteadyDime or like the one I mentioned above Option Alpha. Although no guarantee for the price you pay you typically receive income back far exceeding the cost of the subscription. Forget for a minute the trade recommendations but the education you receive is well worth the cost. It might also be finding people you meet from these sites on the forums that help you along the way. The association of traders in these subscriptions sites truly are a community and love to share ideas. While you can certainly learn how to trade options on your own, there’s nothing better than having a partner or being part of a populace where you can seek support and get answers to questions on the fly or with a long-term perspective in mind.
Cash, patience, time, and support. You probably need these things for most of life’s journeys. That said, too many people idealize the notion of trading for a living. They think it’s going to be easier than it is. They come in unprepared — without cash, lacking patience and time, and minus adequate support. These people tend not to last long as traders. If you want to stand the test of time, take the time from day one to make sure you have the tools necessary to succeed.