The 5 Worst Decisions You Can Make Trading Options I’m going to be upfront with you, trading options is not easy… they even kick my ass at times. They are somewhat complicated, leveraged instruments that can be risky if you don’t take the time to learn how they work and how to use them. One reason why some gravitate towards options, is the ability to take a little bit of money and potentially turn it into a fortune. That might have been the reason why you garnered some interest towards options. Maybe you first started out with picking stocks, achieving solid returns during the bull market. The funny thing about bull markets is that many retail investors believe that they’re stock picking geniuses. At some point in time… you heard about options, and how you can use less to make more…… So you started reading about calls and puts… and how they can be bought for as little as $0.50 and flipped for $2.00 or better…in a short period of time. You might have even started
envisioning the wealth, freedom and options you’d gain. You might have bought some calls in popular names like Apple, Google or Amazon. However, it was losses–not gains you were seeing your account ….. quickly and unforgivingly. Maybe, after that, you started a long search for a better way. But with so many sites, theories and bullshit…it only added to the confusion. Heck, you might have come across this site because of my free report that discusses how unusual options activity can possibly help improve your options trading (by following informed traders). The Main Reasons Are: Leverage: The ability to use less capital to achieve greater returns…resulting in better return on capital (ROC) Better Odds: You’ve got the ability to structure trades that have a higher probability of success. Reduced Risk: Buying options or structured option strategies have defined risk outcomes. Also, the use of leverage allows us to use less capital. Versatility: Unlike stocks, where you are just betting on prices either rising or falling. With options you’ve got greater flexibility– there are strategies for high-volatile markets, low-volatile markets, trending and sideways markets. You are not limited to making directional bets with options. It’s not all doom and gloom if you take the time and learn the right way to approach the options market. That is my goal here at OptionSIZZLE, to educate and help you create success, quickly and for the long term. All done with integrity, clarity, simplicity and transparency You might be new to this website. However, OptionSIZZLE recently passed it’s sixth year last month. During that period, I’ve had the privilege of connecting and speaking with hundreds of thousands of people, either through social media, video, email or this website. Here Are 5 of the Worst Decisions You Can Make Trading Options If you’re new, you’ll find this list very helpful. For those more experienced, it’s not a bad refresher either. 5. Not Taking The Time To Learn Every Facet of How Options Work
If you buy 100 shares of a stock and it goes up $1…you’ll make $100 If you buy 100 shares of stock and it goes down $1…you’ll lose $100 Now, let’s say you buy one call contract of a stock option…and the price of the stock goes up $1…how much money did you make on that call option? We don’t know. There is even a chance that the option loses money, doesn’t change or gains in value. The price of an option is not only a function of the stock price movement but also other factors, like, the option price selected, time to expiration, option volatility, and the risk-free interest rate. If you buy or sell an option, are volatility levels relatively high or low? If you don’t know the answer to that question…that’s a problem. If you’re making a directional bet using options, do you know which strike prices and expiration are going to give you the best chance of coming out on top– if you’re opinion is right? If answering these questions is something you struggle with…that’s OK. However, I wouldn’t be committing a lot of capital to my option trades until you had a stronger understanding of how options worked. You’ve got to really nail down the fundamentals before you can move on to bigger and better things. Believe me, it’s not going to happen overnight….but it’s well worth it in the end. For further reading on this topic, I’ve created these links for you to review: What Every Investor Should Know About Options! Why You Should Avoid Trading Options All Together Stock Options vs. Stocks How To Start Trading Options Successfully The Ugly Truth About Buying Options 4. Wanting To Make Money Right Away As you can see, there is a learning curve involved with options trading/investing. In the early stages of your journey– it’s all about getting “screen time” gaining experience…then followed by learning from that experience.
You’re goal when starting out , is to be able to put on risk –trying to learn how options trade, while avoiding getting your butt kicked. Even if you trade small, you still have to overcome transaction costs (commissions and slippage from the bid/ask spreads). With a smaller account, you’ve got very little margin for error. That means you might have to take a little more risk per trade than you would normally if you had a larger account. You might also find yourself restricted on the type of underlyings you trade…simply because the value of the stocks command too high of a premium for your account size. For example, shorting a naked option on Priceline (PCLN) is out of the question, and poses blowout risk. Also, accounts under $25,000 are restricted to the amount of trades that can be entered and exited in a week, this is referred as the pattern day trader rule. In How To Build A Trading Account With Only $1,000, I discussed my beliefs, that you need to have a skill to fall back on, to provide income to live and help stack capital into your trading account. Success in the market takes times, at first, your ego will bruise and confidence rattled. That’s why I believe in having something else that can provide income during this period. In addition, over the long-term it’s essential to have multiple layers of income generating vehicles. For example, if go through a period of experiencing drawdowns…you’ve got something else to fall back on…that way you don’t feel the pressure to trade—the pressure of trying to create something when the opportunities are not there. I feel like fitness and investments are the two areas where someone may have little to no knowledge in the beginning…but feel that they should be experts in a short period. You never hear about someone getting upset because they can’t create a website like Facebook after reading a book on computer programming. However, some investors feel that they can come out the blocks and start yielding above average returns instantly. Just because you can open an account and start trading the same markets the pro’s do…doesn’t mean you’ll be trading like them right away. Set reasonable expectations for yourself and start small. Anyways, if you’re feeling like you need to make something happen right away financially, and you lack the experience, trading is probably not the thing you want to be doing to generate
income. In How To Build A Trading Account With Only $1,000, I discussed how I invested a small amount of money and created a viable business through Amazon. With less than $1,000 in working capital, I was able to produce over six figures in sales in less than two years. By the way, this article should also help you out: How Much Money Do You Need To Get Started Trading Options? 3. Trading Illiquid Stock Options I imagine you have one of those sketchy Motel places in your town somewhere. The one you would never check in to because you know there is an increased possibility you might not. Often times I’ll receive emails from investors/traders who want my opinion on a particular stock option play. Generally, it’s based off some kind of stock chart pattern that they like…but instead of trading the equity, they’d rather take on less risk and swing trade with options. Of course, these are all great reasons to want to trade options over the equity. However, only wanting to trade options might not be your best option. You’ve got to look at the volume and open interest of the options first. For example, are other traders or institutions getting involved with these options? If the options are thinly traded… that most likely means that the bid/ask spreads will not be competitive. Why is that a problem? Because there are transaction costs with every options trade. That means we need to make up the commissions lost, as well as, any slippage caused from the bid/ask spread from entering and exiting the positions. If we give up too much in commissions and slippage…our trades will have a hard time of being successful–even if we had a rock solid idea. If you want to learn more about my simple and wickedly effective way to figure out if if the options bid/ask spread is competitive, read What Are The Best Stocks To Trade Weekly Options 2. Not Understanding Your Edge Edge, in investing/trading terms, simply means your competitive or statistical advantage over the rest of the market. That one thing which you believe, gives you a positive expectancy on your trades.
If you are not sure what you’re edge can possibly be, I’ll try to set you on the right path. We all have the same access to technology, information and pricing; the playing field is as level as it has ever been for us, the individual investor. Professional traders, hedge funds, mutual funds and pensions have no choice but to be invested. That is their model and how they get paid. However, you reduce your risk by not always being the market, sometimes invested, sometimes in cash…picking your spots and using less money with options. Now some individuals see their edge in picking stocks over a long term horizon…however, struggle with trying to trade stocks short term. Other individuals focus on finding attractive trades by reading up on company and sector fundamentals…others focus on reacting to news stories….some only look at price charts….while others focus on execution and speed. Being right on direction consistently is tough and something I try to reduce by selling options and creating structured option trades that might have a bias using my SIZZLE Method. By observing the actions of large institutions, I’m able to get an idea of where a stock price might go, as well as when that might happen. From that, I’m able to structure trades that give me a probabilistic advantage. Now, for non-directional trades, I focus on selling option premium in stocks or indices–which I feel have expensive option volatility. Again, I then structure trades in which I feel have a high probability of success. I know that these are the two areas I have had the most success in. It’s important that I don’t deviate and what I refer to as style drifting. If you don’t understand your edge…then there is no reason to be active in the market. That’s why it’s best to be able to formulate your own opinions vs. relying on others. If you’re unclear what your edge is or are still in the process of finding it…I highly recommend you check out The SIZZLE Method Report. For those interested in collecting premium passively, I suggest you check out my SPX Method Course. Whether you look into these options for you or other courses I’ve created, that’s up to you. What is comfortable for me…might not be for you (or maybe I haven’t earned your trust and respect yet).
Bottom line, you’ll need to have an edge when trading options…it doesn’t have to be this–but I’m sharing with you, what has worked for me. You don’t want to risk real money without any rhyme or reason…if you are, you’re just throwing darts at board, which can work with stocks Here’s a list of other articles that I created that will help you: How You Might Be Losing Money On Your Option Trades How To Profit From Option Volatility How To Successfully Use Option Volatility To Trade Binary Events Putting Context Behind Your Option Strategy Buying Options or Selling Options–Which is Better? Don’t Trade Earnings Before You Read This Losing Trades? –Stop Second Guessing Yourself The Ugly Side Of Unusual Options Activity Why You Keep Losing Money Following Trading Ideas 1. Not Treating This Like A Business Becoming a successful options investor/trader requires a lot of hard work, dedication and being knocked around. Like most business, they start out small and start evolving to what their customers want. A lot of people have the dream on having six screens, buy, sell, profit and living the dream of riches. When you know your edge and you stick to it, there are a lot days where nothing happens. That is why I highly suggest having another skill or business outside trading/investing. You don’t have to be chained to the computer to be successful, but you do need to take it seriously and make time for it. Yes, the reason why someone trades in the market is to create wealth. However, that is the end result of doing the right things (coupled with a little bit of luck). So what should you be doing? -Record Keeping: Write down why you got into a position, amount of risk taken, trade details
(option strike, expiration, option premium, options bought/sold, implied volatility, price of the underlying stock, historical volatility, option greeks, how competitive the bid/ask spread is, date position was opened and any updated adjustments that were made along the way. I know it’s a lot to write down at first, but it will help figure out what’s been working and what hasn’t been…and make adjustments along the way. Just like a sports team studies game film–you also should be learning from your mistakes and triumphs. When I was a day trading and managing accounts, I would record the trades I entered and talk out what I was doing. I did this so I could review and study it later. -Size Correctly: It doesn’t matter if you’re buying premium or collecting premium–you CAN’T let one single trade take down your business. You’ve got to always take into account what the worst case scenario is–and ask yourself if you’ve given yourself enough margin for error. Make note that premiums can change a lot faster for nearer term options than longer term options. Also identify if you’re playing for a binary event or trying to make out a position out of the options. Of course, you’ll have to have some winners and losers along the way. How you manage these positions is critical. Here is a list of articles focused on managing option positions: Greater Profits In Less Time On Your Option Trades When To Stop Out of A Trade and Take A Loss Why Size Matters–Especially in Options Trading 3 Ways To Keep More Profits and Know When To Sell Adjusting To the Current Market Volatility The bottom line is that you’ve got to have a process–a game plan–and be able to execute. This of course, will not happen right away. But some of these mistakes can be avoided or reduced substantially. If you notice, there are a lot of links to previous articles in this piece. The reason is that practicing and learning is a never ending process. Think about it, do you think a boxer’s routine isn’t similar every training session?
Do you think he tells his coach—”Hey we did the heavy bag and speed bag yesterday–is there something new and exciting we can do today?” Boxers shadow box, jump rope, do speed bag and heavy bag training–all the time— because that stuff works. We are referring you to older articles not because we are lazy–it’s because that stuff works…you’ve just got to keep learning and trying to get better. Now it’s your turn. Is there anything that you’re still struggling with, that we, here at OptionSIZZLE have not touched yet or a mistake that you felt I should have included? If so, please let me know…I’ll be hanging hanging out in the comments section below.
Hi I’m Josh, and I’m a finance guy. I cut my teeth in the markets on the Chicago Mercantile Exchange, so I saw firsthand how the “sausage was made” – and it usually wasn’t pretty. Because I quickly realized that fund managers only care about getting their fee's first even though 95% of them underperform the overall market. That didn’t sit right with me, so I left that world – And I discovered how to use my financial know-how to empower the little guy by using high-powered investing techniques – including the only “real time” market indicator the pro’s use to spot future price direction. Now I’ve shared my message with over 129,000 people like you, and everyday investors have suddenly started making money in the market for the first time. Make sure you visit http://www.OptionSIZZLE to access your FREE report and eBook that will teach you how to trade options successfully to help you create wealth, freedom & options for you and your family.