Options Trading For Beginners: What Not To Do

So many moving parts in the world right now, collectively and individually. It’s daunting. 

At the individual level, many of us are examining how, where, and why we work. After discovering (or rediscovering) positive components of spending time with our family and working at home. Thousands, if not millions of people, appear ready and able to adopt some form of this lifestyle going forward. 

For people with an attraction to the stock market, options trading can sound like an appealing work from home option. As you can see from Google Trends, there has been a significant uptick in searches for options trading. Here at SteadyDime, we have seen our best months for subscriber growth. While that’s great, it can also be dangerous for individuals without proper preparation. In this article, I discuss two of the most important factors to consider if you’re thinking of trading options. 

Don’t Use Retirement Funds to Trade

A recent Wall Street Journal article ​(you might run into a paywall) concerned me. It indicated that, increasingly, experts think it’s okay to tap retirement funds to deal with unemployment or some other emergency. While these “experts” make compelling cases, they also run the risk of blurring lines. 

Give people an inch worth of advice, and they’ll take a mile. In other words, a reasonable person could rationalize the examples the Wall Street Journal presents to their situation. If it’s okay to use retirement money to do X or Y, how is Z any different? 

For example, you own two restaurants. You need tens of thousands of dollars to keep them afloat. They’re your livelihood. So, it’s justifiable to pull a 401(k) loan or draw money from your IRA. It’s tough to argue with that logic. It’s a risk, but if all goes well and you’re disciplined, you can replenish those funds over time as things start to improve. That’s apparently what many “experts” are saying these days. 

Apply that logic to this hypothetical. 

You get laid off. You need to forge a new path. That path could comprise just about anything, trading being only one avenue. You’re stuck at home and bored, so why not? You have been pretty good at investing. Even have made a winning trade or two in your time. You have been following the market more than ever, so you decide to make a run at options trading. However, to do this, you need the money and don’t have any readily accessible. 

You decide to withdraw $25,000 by blitzing your 401(k) or retirement fund. If the experts think it’s okay for a restaurateur, why should it be any different for somebody else engaged in protecting his or her overall livelihood and blazing a new professional path forward? I mean, you’re only looking to earn some extra income or maybe hedge your current portfolio.

Here presents a logical line of thinking, but it’s equally as dangerous. While it’s difficult to come by reliable data on this, I would argue that success at trading might be tougher to realize then success in the restaurant industry. Restaurants are already notorious for their excellent odds at making the most talented unsuccessful. Many people do not take the proper time to train themselves in the underlying mechanics of options trading. Many will write a call or sell a put and not understanding what impact volatility will have on the option. Most have no idea what options greeks even are before they place their first trade.

Long story, short — resist the urge to spend money designated for retirement on trading. Keep your future of financial security intact. Build and/or maintain a proper emergency fund. Pay your bills. Take a vacation. If you’re lucky enough to be able to build up a fund to trade with after you check these boxes, go for it.  Only be sure you have taken the time to put yourself through a proper options trading course.

Don’t Rely on Intuition 

Part of my concern with using retirement money to fund trading ambitions stems from the fact that you can lose money — lots of it — trading in an instant. It’s incredible how a significant sum of money can be there one second and gone the next.  Position sizing is always one of the worst mistakes of new option traders.

Damage tends to occur when you go into trading without a plan or proper training. You approach a position that’s losing value like a deer in the headlights. You’re paralyzed. Especially when a position turns negative, and you sit and wait while praying to the market gods for it to come back. During this period of inaction (because you never had an action plan or a fundamental options trading basis), your account dwindles in value. It’s challenging to come back from this. The frame of mind this scenario creates makes it easy to dig yourself a deeper hole to zero. 

Loss of hard-earned capital happens because too many people execute trades based on their intuition. And having early success trading on a hunch — or your gut — is almost a bad thing. It triggers a false sense of confidence and courage. 

For example, recently, we had a gut feeling Beyond Meat would rally. It made intuitive sense to us that more people are switching to a vegan diet. Not to mention with a meat supply chain shortage in a pandemic, people might be more apt to pick up this “meat” and give it a try. I base this on the fact that a few of us did that here. Grilled up the Beyond Meat burger and hey not bad. If we’re feeling this way and acting on it, others have to be on the same or a similar trajectory. Right?

If you look at the BYND stock, we were 100 percent onto something.  As Bloomberg News recently reported, Beyond Meat is Having a Moment.

As of this writing, BYND is up almost 90% year to date. That is even after an over 50% drop at the start of the pandemic. Had we made a trade based on our gut, we would have been correct. We would have made money for ourselves and our subscribers. Lots! It would have been as close to shooting fish in a barrel as you can get in trading. But it still would have been a speculative trade, based on little more than my view of the world around us. We had zero edge or even fundamental information or research on this company.

You can make winning trades like this. Some people can do it more often than others. Some even do it for a living. But those people, like professional athletes, are few and far between. Speculative trading isn’t a plan. Also, if you’re setting entry and exit targets, you’re not adhering to a policy that looks at activity and makes objective, quantitative buy and sell decisions.  The reason we succeed here at Steadyime is that we are methodical about your process and research. When you start trading, do NOT ever stray from that. No matter how tempting a BYND can be,

It’s fine to take my tiny speculative positions. Does that inkling fit in with a more sophisticated plan you can apply to any stock or option that comes across your screen or pops into your head? 

You Need A Coach

When we traded investor capital in our previous careers, we had experts guiding us.  All of us traded professionally on Wall Street in different forms. Hedge funds, mutual funds, and broker-dealers. We were fortunate to be given training and be paired with mentors to guide us. Even with that, we lost enough of the time to learn from our mistakes to know you need guidance along the way. 

That’s when we realized that you couldn’t day trade without a real plan that you (or someone else) has tested, backtested, and tested and backtested again and again. As mentioned previously, have a process you know you can stick with during dull markets and even during a pandemic.

If you’re able to make a living at it, there’s probably a no better job in the world than trading. You know — move to Hawaii, wake up super early, hit your earning target shortly after the sun comes up, and spend the rest of your day on the beach.  That may be far fetched for most, but what even earning an extra amount of income that covers a vacation or even better vacation home. What if you knew how to hedge your portfolio and could sleep at night even if the futures were limit down? Take the time and effort to teach yourself options strategies.

But to make a living at it, to live comfortably as a trader requires a plan that puts financial security and a reliable methodology at the forefront. Like most things in life, you have to put in the time and hard work to make the ultimate fantasy reality. 

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