Where to start? This is often the question many beginners of option trading ask. I’ve listed here five tips that will set you on the correct path to profitable option trading.
- Understand how options work and move. There are many free online resources that you can use to learn about options and how they work. It is fundamental that you understand that options are derivatives of another product and that the product price movement affects the movement of the options that you have bought or sold. A solid understanding of the exponential benefits and dangers of trading options is key.
- Volatility. Understanding how volatility works and how it affects the pricing of your options is very important. Volatility is really the main driver of option pricing besides the options in the money premium and time premium. Entering and exiting a trade as well as choosing what strategy to use revolves around your understanding of volatility.
- Know your underlying product. Whether you’re buying or selling options on an index or a stock, it is imperative that you understand the underlying, how it moves, and what news may be coming to affect the price movement. Trading the stock or index for news that you feel will make it move hard, either in a certain direction or non-directionally, requires an understanding of what the drivers of the stocks pricing are.
- Setting reasonable goals. Once you know the options and the underlying that you are trading, it is important to set reasonable trading goals. How much money can I reasonably make? How much risk do I want to take? How does this affect my overall account? These are all questions that you need to answer before you begin trading options strategies.
- Have a plan. Nothing is more important in any kind of trading than having a good plan. When will I enter? When will I exit? What are my profit goals and adjustment plans? How will I manage it whether it goes for or against me? These are all fundamental components of a good plan.
At Sheridan mentoring every day we work with traders to help them develop these skills. Please take all these tips and apply them to your options trading business.
Mark Fenton- Senior Mentor
Ideas or Questions? Email them to info@SheridanMentoring.com