October 27, 2006 10:13 PM
Basics of Option Trading
Any journey starts with a single first step. Everyone agrees that this is true, but what is the first step for the beginning option trader? The vast amount of information can appear to be overwhelming, and is full of terminology that might as well be ancient Greek for all the sense it makes. Everyone you meet, and every website you visit has some different advice. There are a few things to think about even before you ever make that first trade. What are your Goals It is important to have some idea of where you want to go before you begin. The field of Options trading is large, and there is a lot of variety in it. It is better to take a general look at the different types of investment opportunities available, and select the ones that interest you the most.
You are going to have to do a lot of research and a lot of study in order to be successful, and it is going to help if the topic is one that you find to be fascinating. Also, you need to have a good idea of how much time and effort you are willing to invest in your investment strategy.
Options are time critical investments, and if you are only planning to dabble a bit in the market, it would be better to either keep your Option portfolio very small, or even to seek a more long term and less interactive type of investment.
In For a Dollar or a Dime
One of the most important options trading terms a beginner needs to completely understand is risk capital. Most reputable brokers will advice you to invest in options with risk capital. Risk capital is that portion of your total investment capital that you can afford to lose. Long term bonds, savings accounts, mutual funds are the places for your retirement income, and your landlord's checking account is the place for the rent money.
A beginning investor in the option market needs to know exactly how much he is willing to invest, and once this amount is established, he needs to stick with it. There are practical reasons for this. One of them will be investor's personal financial security concerns. If you are overly worried about loss, you would not be able to make decision with a clear head and in a confident manner. Determine what amount you are going to invest, and set it aside, and stick with it.
Do you Speak the Language
Calls, puts, strike price, margin, leverage, long position, expiration date, bid, and ask are all Option related terms. If you are unsure of the meaning of any of them then you need to go to Option's language school for awhile. Investing has its own unique terminology, and you can not afford to be confused.
Take the time to learn what everything means. It is going to be important to give yourself a bit of education in quite a few different areas of trading. You are not going to be able to evaluate Broker's websites, or decide on a personal method of analysis until the basic framework is in place. And the basic framework is terminology.
Start in First Gear
You have to crawl before you can walk. Learning to invest your money in any market, and even more so the complex Option Trading market is not the kind of thing that is best served by jumping into the deep end of the pool right at the start. You are almost certainly going to drown. Experience is very important here, and experience is only gained by the actual doing. Start slowly and make a few small investments.
It is good to have a sample option trading strategy in place. It should be on a rather small scale involving only a small percentage of your available risk capital. Once you gain a little confidence, you can increase the amount of your investments. How long this takes is going to depend completely on you. Remember that there is no magic formula here.
The beginning investor should not be too nervous. There may be a lot to learn and it may seem a bit confusing, but it is learnable. In the end, it is going to be his own intelligence, and his own instincts that are going to determine his success or failure. Most people would ask for nothing else, but to have their financial fate in their own hands. Remember the words of a wise old investor who once said, "Every Option Trader was a beginner at one time, even if for some, it was only a few minutes."
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