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8 Dos and Don’ts For Options Traders

By Chris VermeulenStock MarketsJul 23, 2021 06:31PM ET
www.investing.com/analysis/eight-dos-and-donts-for-options-traders-200593371
8 Dos and Don’ts For Options Traders
By Chris Vermeulen   |  Jul 23, 2021 06:31PM ET
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Trading, especially options, can be very exciting and rewarding. Having said that, you should not be trading options before learning at least the basics about how to trade them. Options are very different from stocks, and there are more factors that go into the pricing. Many view it as a get-rich-quick scheme, while others think it is gambling. I am here to say it is neither, but you have to know the rules before you can trade them if you want to be successful.  Here are eight dos and don’ts for options traders.

1. Do not always swing for home runs or put all your money into one position

Do not buy options contracts way out of the money with hopes that it will turn $100 into $5,000. When you do this, you have a very small chance of winning long-term and most would say this is gambling. If, by chance, you do strike it rich, you will give it back eventually as this is not a winning strategy.

2. Do go for base-hit trades with a consistent and steady return

These trades have a high probability of winning and a low chance of losing. Stick with 5%-10% allocation per trade. Make sure you properly hedge or one bad trade could result in giving back all your profits.

3. Do not change your strategy based on commissions your broker may charge or to accommodate a small account

If you take a trade or don’t take a trade because you don’t have a big enough account, wait until you have the proper funding to execute your trading strategy. 

4. Prove out your trading strategy with a sim account

This is always the best practice. I have seen new traders lose lots of money just trying to understand the platform with which they are trading on.  Also, they make strategy mistakes. Go in sim until you are profitable for consecutive months. Don’t go to the school of hard knocks and lose money while you learn.

5. Do not trade on margin if you don’t understand it

If you don’t know how margin works, do not use it to trade. Early on I had a margin call and these are never fun trying to find the money to make your brokerage whole. It can mess up a lot of your existing trades if you have to liquidate. 

6. Fund your account over what you intend to trade with

Give yourself a buffer here. If you intend to trade $5,000, put $7,000 in your account. The more the buffer, the better off you will be, especially if your first few trades are losers.

 7. Do not expect to get rich quickly or any significant income from a small account

Start little, save, then get big as you grow. Too many times I have seen new traders put everything into one trade. When that trade goes south, they lose lots of money then double down with higher risk. When this too is lost, they are done trading. Don’t be that person.

8. Move on from losing trades – do not chase

If you see a big move that a stock has already made and you want to join the party, think twice. Once an underlying is extended, there are low-risk trades. If you are leveraged with options, it is an even lower chance to win. Many traders make money by jumping on the train late. Sooner or later, if you do make money this way, you will give it back over time.  This is a losing strategy. 

Options when bought are purchased at a debit to the buyer and should be considered assets. So when you buy options, the money is debited from your brokerage account. It’s exactly like buying a stock.

As mentioned above you can also sell an option, without owning the shares. Options when sold are sold at a credit to the seller. When you sell an option, it should be considered a liability and money is added to the brokerage account at the time of sale. Not many things are guaranteed in the market, but this is. However, you can’t withdraw this money until the trade has been closed. Usually, this money is used to offset the margin required for selling the options.

8 Dos and Don’ts For Options Traders
 

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8 Dos and Don’ts For Options Traders

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Comments (11)
Alberto Mallari
Alberto Mallari Jul 26, 2021 7:45AM ET
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thank you Chris!
David Sanz
David Sanz Jul 25, 2021 10:53PM ET
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great strategies and advise looking forward to more in depth articles
Oladimeji Yinka
Oladimeji Yinka Jul 25, 2021 7:25AM ET
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Good advice to building a strong future.Thanks
shubham gupta
shubham gupta Jul 25, 2021 12:40AM ET
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Can anyone suggest a good channel for learning on YouTube plz
Sathish nag
Sathish nag Jul 24, 2021 9:47PM ET
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your explaination is good sir.. thank u.
Ethan Strong
Ethan Strong Jul 24, 2021 7:51PM ET
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I suggest watch and learn from Tastytrade. They have an excellent teaching section on their website.
jitendra sah
jitendra sah Jul 24, 2021 10:47AM ET
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always hedge options trade
Fabio falec
falec Jul 24, 2021 10:47AM ET
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Laughable, hedging meand you are unsure of the position you are taking, and you give the money twice to your broker
David Hermansen
DaveH Jul 24, 2021 8:59AM ET
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Free traininghttps://www.optionseducation.org/Beginners - sell premium, don't pay it
corona killer
corona killer Jul 24, 2021 7:36AM ET
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use stop loss
CHADWICK RICHINGTON
CHADWICK RICHINGTON Jul 24, 2021 2:33AM ET
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Just buy SPY calls
ECL SALES
ECL SALES Jul 23, 2021 8:56PM ET
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Thanks a lot!
 
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