Succeeding in Options Trading

The beginning options trader may run across ads on the internet promising automatic profits in trading options. Anyone making a living trading options knows that profits are not automatic and that succeeding in options trading requires knowledge, dedication and skill. On the other hand succeeding in options trading is absolutely possible for those involved in occasional options trading as well as the professional.

The basics start with things like knowing the difference between strike prices and spot prices in options trading. The strike price is the price agreed upon in an options contract. This is the same price whether the contract is a put or a call. The spot price is the current market price. Succeeding in options trading comes down to the ability to accurately forecast whether the spot price of the equity underlying the option will diverge significantly from the strike price. If so the question is how much of a difference will occur which will determine potential profit. Traders who expect the strike and spot price to diverge will either buy calls or puts depending upon if they thing the spot price will go up (calls) or down (puts). Traders who do not believe that the spot price will to up from the strike price will sell calls and those who do not believe that the spot price will go down from the strike price will sell puts.

The next part of succeeding in options trading is the dedication needed to learn the tools used in predicting equity price movement. This is the world of technical analysis. Markets tend to repeat themselves and the repetition of equity price patterns is predictive of subsequent price direction. Learning the multiple price patterns that predict subsequent market price movement is one of the bases of succeeding in options trading. The other basic aspects of trading that a trader needs to learn and integrate into either a long options strategy or short options trading strategy is when to trade and when to observe. The advantages of options trading are that the trader only invests a small amount of his or her money to buy the contract premium. This provides a substantial leverage in the event that the underlying equity price moves dramatically. However, more often than not price movement does not lead to profits in options trading. This is why large institutional investors typically make their money selling calls and puts and not buying them. Learning when to stay out of a trade can be as important as knowing when jump in.

The final part of succeeding in options trading is realizing that the act of trading is essentially a performance art. It is done by human who get nervous, get cocky, get tired, and can do dumb things. It is also an art that be performed with stellar results. Part of risk management in options trading is keeping a cool head in a volatile market. Part of succeeding in options trading is knowing that times of chaos and high volatility are good times for options trading when the trader is knowledgeable, dedicated, and skilled in his art.

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