Daniel X. Bustamante, Co-Founder And Lead Coach
Long ago… in a galaxy far far away. Alright, just joking, but really, many years ago I began as a futures trader. Yes, I traded futures as a proprietary trader at the age of 23. This was my entry into Wall Street and the world of trading. Now, eventually, I moved to options trading which is really just a derivative, like futures. I really like options and in today’s trading world so do most retail traders.
If you are new to options trading it can be really exciting. The gains can be insane but the downside can also be ugly. I was there in 2011 when the weekly options were first released so I’ve witnessed the good, the bad and the ugly with options trading. Even more, I witnessed it as an institutional trader as well as being a coach to retail traders in the markets.
In this article, I am going to cover five things you should know as a beginner options trader. Now again, take this as you will but this is 14 years of experience as a coach and trader doing this:
- Focus on the momentum stocks
- Start with a simple strategy first
- Don’t get crazy with the risk (it can be hard not too)
- Learn to scale-out
- Take it Slow, Joe
1. Focus on Momentum Stocks
Trading stock options for beginners can be confusing so let me make this really simple: Stick with the momentum names. What names do I mean? Apple, Microsoft, Netflix, Facebook… stuff like that. But why do you ask? Because there is so much volume on these stocks and the options underlying on them that it becomes an easier way to trade. Options trading is almost available on any equity but that doesn’t mean that you should be trading options on those equities. Some of the volume on those chains are just terrible which makes trading them impossible and the market makers end up winning.
Trading options on momentum stocks is what really has driven this market, especially in 2020. Yea, it is good and it is bad, but as a new options trader, it is a great learning place.
2. Start with a Simple Strategy First
Options trading for beginners is a crazy world, especially being new. There are literally so many strategies that it is going to get confusing. So, let me, again, direct you in the right direction.
If you have over $100,000 to start with then selling options is going to be hard to do. Period.
So, since most retail traders will start with $5,000-$20,000 let’s discuss where to start with simple options trading strategies. Start on buying calls and puts. This is called directional options trading. It is simple, direct and you know how much you can lose on any single trade before putting it on. Further, you don’t have to get complex with it. Now, look, Wall Street loves to sound smart so that you give them your money to manage but in reality very few of them are actually smart (don’t email me on this, ha!).
What is considered advanced options trading strategies does not actually mean better. You can keep it simple with buying calls and puts.
3. Don’t Get Crazy With Risk
Here is the easiest downfall in options trading. You’re going to trade and with any luck, you’re going to make some money really quick. The easiest trap is to start adding on risk to try to make more. Nope! Do not do this. Trust me on this, or don’t, but this is the fast way to the poor house.
I’ve taught beginner options traders who have made $50,000 in a month only to lose all of it the next month on a few trades. Why? Because it’s easy to get the head rush of feeling great and like you’ve got it under control. That usually leads to taking on more risk and never sticking to a model. Trading is really a business and you need a proven model. That risk model is how much capital you put on each trade and you want to keep it continuous.
In our OptionsAbilities course I put together a 30 + page trading manual that discusses a 3-tiered risk model that you can use as a student. It can be adjusted based on your account size and risk tolerance. Now, hopefully, we’ll see you in this course as I would love to teach you but if not, try to make a risk model for yourself, you’ll be glad you did.
4. Learn to Scale Out
So whether you are trading options or stocks take this insight as I know it will help. Scale out. Period.
What does this mean? This means that if you have, say, 10 call options on Apple that are profitable learn to sell some of them as the stock trades higher. This is called scaling out. What happens to most beginner options traders is they sell their gains all at once. This often leads to missed gains if the stock goes higher (or lower) or worse, if the trade goes against you, you never lock in any gains.
Scaling out of options trades is THE way to maximize your profits when you have a trade working in your direction. You need to do this almost all the time because it just repetitive
5. Take it Slow, Joe
The last thing you want to do is put $5,000 into a trading account and then blow it all. This happens more than you would think so hear me out on this. Go at this slow. You don’t go to medical school for a month then get on the operating table like a young Doogie Houser ready to perform open heart surgery, it takes time.
Options are the same. It’s easy to want to speed up because you’re going to make money but you’re going to make mistakes along the way. When you make those mistakes (and I promise you they will be made) you need to make them small so you still have a bankroll to trade with.
So how can you do this? Set up a 6/9/12 month plan to where you want to be. Do that, and you’re further off than most. Then, start by learning how to trade less and follow a few stocks. Don’t try to learn it all that quick, it will come, just take it slow.
Look, I’ve been trading for 14 years. I’ve seen students knock it out of the park in six months then I’ve seen some students take four years to get this right. Whatever it is, take your time, stick with a simple plan, and don’t get greedy.
Options trading is a great place for beginner traders to start….if…if you do it right. I hope that reading this article lends to insights on how to do this and I wish you the best in your trading future
Thanks for reading.