Trading options can be complicated unless you have a fundamental understanding of how it all works. Despite the similarities, trading in securities/assets (stock, forex, crypto, etc.) is not quite the same as the options trade. If you are relatively new to trading options, let the following suggestions help you get the edge you need.
Read a Book on Option Trading
There is no better way to learn more or just get started with any kind of trading than to read a good book on the subject. Reading books was pretty much how we learned most of what we did as a student, and there isn’t any reason why learning about advanced trading strategies should be any different. This book on option trading tips is a good place to start for both beginners and intermediate traders.
Note that there is certainly a lot of knowledge floating out there on the net, but most of it is random, disorganized, and fragmented. Besides, you cannot always verify the accuracy of information or suggestions you find on the internet. On the other hand, a published book from a recognized name will act as a reliable source of knowledge when you need to learn more about options trading.
Establish Your Risk Tolerance
All investments are risky, and unless you know how to invest, in what, when, and by how much, options trading could be too risky for you. This means that estimating your own risk tolerance is an all important step towards keeping potential losses to a minimum, while also raising the chances of earning a profit. Consider your risk tolerance to be a combination of a few main factors.
- The total amount of money you can afford to invest in the option contracts.
- How much of it you are willing to risk.
- How much of it can you practically afford to risk.
Risking more than a trader can afford to lose will increase their chances of losing money. It creates scenarios where traders are more likely to panic and sell at a loss before their long-term strategy can come to fruition. That is unlikely to happen when you are trading within your established risk tolerance.
Start Mixing Strategies
If you have the basics covered, then you may want to start implementing two or more strategies simultaneously to make the most out of your money and time. However, the key is in keeping the investments smaller, until you gain enough experience to invest more into your strategies with confidence.
For example, a diagonal spread with calls is a low-risk strategy that you can try out. It combines a long-term buy-call spread with a comparatively short-term sell call spread at comparatively lower and higher strike prices respectively. It keeps your risk of maximum possible loss limited only to your cost of trade for the spread.
As a last tip, keep in mind that it’s never a bad idea to make smaller investments and underestimate your risk tolerance by a small margin. Trading is all about taking risks, but there is a big difference between affordable and unaffordable risks.
