As a young retail option trader, one of the first things I did was buy an options program called “Options Made Easy.” Some of you may remember it from back in the day. It had three sets of red, yellow and green lights to guide you as an option trader. On the surface, it seemed easy. But in reality, option trading is far from easy.
It Takes Work
It takes a lot of work and patience to be a profitable option trader. Getting started by putting some cash into a trading account is the easy part. But that is where the easy stuff ends. Not only do you have to learn about calls and puts, different strategies and technical analysis, you also need to know the option greeks. That is already a lot to throw at a human being. Then comes management and all the psychological and emotional aspects of trading. You think learning the option greeks was hard? The psychological element is the killer for most.
Out of Our Element
As human beings, we are not particularly designed to be traders. I don’t know too many people who love to be wrong. As a trader, you will be wrong countless times. The emotional aspect of trading is huge, many traders and investors are not prepared for it, and most do not overcome it. I hired a trading psychologist myself, and it was the best money I ever spent hands down. That is why as a mentor, I focus on that aspect a lot. So aside from what options can and can’t give you, you need to ask yourself, “Can I handle trading?” That said, options can lower an investor’s or trader’s risk and produce profits that increase his or her P&L.
Options cannot perform miracles. You definitely can lose money trading them, and many option traders do. But options allow you the chance to hedge, use leverage and generate income. Hedging essentially reduces risk. Is that not one of your main goals as an investor or trader? They can protect individual trades or your whole portfolio if need be. To me, that is invaluable.
Options also provide leverage. You can use less money to have more exposure to a stock’s piece movement especially expensive stocks like Costco Wholesale Corp. (COST) and Home Depot Inc. (HD), for example. This in turn gives you more flexibility to trade underlyings that may be too expensive for your portfolio.
Even though a trader’s or investor’s No. 1 goal is to preserve his or her capital, options can generate income. Reducing risk is the most important attribute to options, but being able to increase your profits is not such a bad thing. The best part about options is there is a strategy for whatever your outlook may be. With stocks, you simply can’t make money from a sideways position solely on the underlying.
Profit and Protection Potential
Yes, option trading and other types of trading are very difficult. Option trading in particular may be considered the hardest to master because there are more moving parts than, say, buying and selling stock. But if you are disciplined, option trading opens so many potential profitable and protection scenarios that are well worth it in my opinion.