Why You Can’t Trade Options
Options are arguably the best way to trade the market watch a video highlighting the benefits of options here ( and while there are thousands of people in our trading community at Shecantrade who agree), for those who might be new to trading options, you might be asking “how did you learn to do this?” followed by; “trading seems like such a mystery, I’m not smart enough to trade”. I can’t tell you how many times I have heard this statement over and over again! Let me tell you how to invest in options and why you need to overcome these barriers:
Formal Institutions Don’t Teach It
We all make money, and we work hard to earn the dollars we acquire over our lifetime, so why is it that we never had a class that focused on how to grow our wealth? It is shocking how little education is offered in formal education about actually growing your wealth. What is most commonly discussed is how difficult and scary trading can be, the importance of saving our money (and yes I do believe that smart investing means that you do need to have savings). I also think it is important to have some money set aside to focus on growing your wealth. Regardless of whether you are buying property or investing in the markets yourself or handing your investments over for someone else to watch over it, everyone should be doing something with a portion of your money in an attempt to grow your wealth. While there are elements and skills that are mentioned at a very surface level in some institutions, most people feel like that want to learn more about investing but don’t know where to learn. If formal institutions taught students about the choices of investing that they have to make, I believe that the conversation about investing and specifically DIY investing, would be much more elevated. Learning to trade regardless of whether you are trading options, stocks or etfs, is the same as learning any other skill.
I believe that if students had an opportunity to be exposed to the world of investing by means of being able to learn concepts about different markets, technical and fundamental analysis, pricing models and experience making decisions about trades, we would all be a lot less scared of an industry that is currently cloaked in darkness. In an age when information is only as far away as your next google search, it is time that formal institutions as well as financial banks/brokers provide education material that exposes willing learners to the tremendously vast world of ‘the markets’.
You Think You Have to Know Every Detail About Trading Options to Trade
Trying to learn everything about options can actually make you feel so overwhelmed that you probably won’t do any trading at all. If your plan is to trade options then you need to know the information relevant to what you are doing. For example knowing how to price an option using Black Scholes might be great information but the complex calculations will probably just frustrate you and will not help you trade options at all. What you should focus on is how to implement the specific trading strategy that you want to use. For example if you want to buy puts and calls, then you should know about the specific factors that effect the price of a put or call and how the price of the options changes with the price of the underlying stock. Focus on specific areas to trade and build up your skill set over time, why worry about learning elements of the market that aren’t relevant to you? If you choose to focus by starting to trade options by selling puts ( a common way to invest in options ) then it is important you are learning how you plan to decide when to buy options vs selling options. Read here to learn more about buying and selling options. And Here about how to manage risk. how to find trade entries and exits.
You Need to Learn the Language of Options Trading
In the world of options trading, a call isn’t the phone ringing. When it comes to options there is a language to be learned. Since we currently don’t have discussions about options trading in the mainstream media, or formal institutions, it is no wonder many investors might be nervous about options. The language is unique to options but if you focus on the specific terms related to how you are trading then understanding and learning the language will become an easier task. Taking time to understand the terminology will be essential to the implementation of your trading plan.
Options Aren’t a Tangible Item
When you think about it, an option doesn’t really exist in a tangible way, we can’t touch it and unlike a stock it will expire. It is just a contract between two parties. Unlike buying property or a car, you won’t ever be able to hold an ‘option’ in your hand. Whether you are selling an option, or buying an option, you are dealing with a traded product that will expire after a certain timeframe, this means that you will need to be correct about your assumption of the underlying (AAPL stock for example) and how much time it will take to get there.
So for example, if I looked at a stock like JPM and thought the stock was moving higher, I have a few choices of strategy that will allow me to make money if the stock moves higher. Each of these strategies have different risk/reward profiles. For example I could buy a call or sell a put credit spread. Both of these strategies will make money if the stock moves up and both have different risk/reward profiles. While you can trade in a way that will mean you can end up owning the stock when the option expires, most often I prefer to trade by entering and exiting the trade before the option expires. Trading in this way means that I may be looking a call options strategies that expect to hit my profit target well before the option expires.
There Isn’t Just One Way to Trade
There are many options strategies, and many ways to trade an option. Every trade has to have someone else who is willing to take the opposing side of your position in order to have a trade executed. If everyone had the same outlook or trading assumption, then there wouldn’t be anyone to trade with. Yet, traders will often go out in search of the perfect system to trade, which is, after all a holy grail of sorts. The reality is that there is more than one way to trade a stock, with varied timelines and assumptions. Different traders can look at the same stock and have the same assumption, but choose to place different trades. For example, if I have a strong assumption that TSLA is going to move up and has some momentum, some options strategies I could consider could be put spread strategies like an out of the money put credit spread with an expiry of the same week, or perhaps an at the money credit spread with a two week expiry, or buying a call with a few weeks to expiry. Each options strategy will produce results if TSLA moves higher. When you embrace the amount of options strategies a trader can choose from, you have the ability to free yourself up to focusing on the trades that cater most to your personality and especially your risk tolerance. If you are a trader who doesn’t like big risk then options strategies like put credit spreads and call credit spreads may be some that are worth learning versus a different option strategy like selling straddles. And of course, let’s not forget the probability of success of trades along with timing the entries and exits. As you refine your trading style and hone in on the trade set ups you like to use, keep in mind that many traders may choose to enter trades differently, and this ability to tailor trades to the optimal way you like to trade is a freeing experience.
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