Are you brand-new to options – and want to jump-start your trading education on the right path? This post gives you five easy steps to start learning the basics of options, including ideas for setting up your first trade. I can’t count the number of times new investors approach me at a tradeshow or event and ask: “If you could recommend one good resource for me to start learning about options, what would it be?” Well, folks, I’m going to do you FIVE better than one resource today by laying out what I think are five great steps to kick-start your options education.
1. Start with options basics.
Can’t trade options until you know what an option really is, right? There’s no shame in starting absolutely from square-one and making sure you know what puts and calls are, what a strike price is, what “expiration” and “assignment” mean, and so forth. These are crucial concepts to every options trade you’ll ever make, so it pays to understand them early.
If you’re a reader, I’d suggest you download our free Intelligence Report Options: The Basics and give that a read.
If you’re less bookish than TV-ish, check out my online video Buying Options: The Basics. You’ll find that front-and-center in the Rookie’s Corner of TradeKing’s Learning Center.
2. Set aside some “learning capital”.
Like any investing strategy that’s new to you, you may lost money as you learn. That’s why it’s important to set aside some capital that you don’t need for any other purpose and use it as your trading capital – or better yet, “learning capital”.
If you lose any amount of this – and every veteran trader worth his or her salt has – make sure you get to the bottom of why, especially how you can avoid that mistake in the future. If you learn a valuable lesson from a trading mistake, it’s not money lost – it’s tuition. Don’t let ANY loss of capital be merely a waste of your resources. If you learn from your mistakes, eventually you will make less mistakes – and more money!
That said, it’s important to note that options aren’t suitable for everyone. If you don’t have this “learning capital” to lose, it may not be wise to try options trading until you do. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.
3. Learn from others’ mistakes.
Did you realize that buying a call option – the strategy most newbies try first – is actually a difficult play, with a highly likelihood of losing 100% of your initial investment? Luckily there are options plays more suited to beginning options traders, with limited and known risk on the upfront and a statistically higher probability of success.
Do yourself a huge favor and download this free whitepaper: Top 10 Mistakes New Options Traders Make.
4. Check in with your market outlook.
It’s not enough to know an options strategy is suitable for a beginner. You should ask yourself: does this strategy jive with the market’s direction right now, and my outlook on its future direction?
Also, does the stock work nicely with the strategy? (If you’re trying a strategy that works best in a low-volatility situation, you’d better not choose a rock-and-roll stock or try your trade during earnings season; in both cases volatility will tend to be higher and throw you off your game.)
Login to TradeKing’s Options Playbook (under the Education menu), and click around the Plays section. Here you’ll find options strategies (or “plays”, as we call ‘em) categorized by skill level and market outlook. When you find a match for you, take a close read through the play description. This’ll give you the lowdown on the strategy’s opportunities and risks.
5. Ask a million questions!
You’re always welcome to ping me with comments on this blog, but why stop there? Our Trader Network is teeming with investors and traders, both beginning and advanced, who are sharing ideas and strategies every day. Ask your question in our forums or in a blog post and see what you can learn from it. Check out what other traders have been discussing – chances are you’re not alone in your question. I’m confident you’ll be pleasantly surprised as how much you can learn this way.
Another great resource for Q&A is the TradeKing All-Stars blog. Lots of experts in both options and other instruments blog here daily. You should also keep one eye peeled for Nicole Wachs’ Rookie Q&A events – they’re listed on the Live Events blog as they occur. Our Director of Education and former floor trader Nicole Wachs sits down with options rookies, just like you, for a brisk Q&A that’s guaranteed to cover some good ground for everyone new to options.
You can succeed at options trading! Patience, smarts, dedication and, most of all, a commitment to trader education, is all you need to trade options effectively and profitably.
Regards,
Brian Overby
TradeKing's Options Guy
www.tradeking.com
[image: Steps in many colors by jurek d. on flickr]
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options available at http://www.tradeking.com/ODD.
Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities.
TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.
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