5 Keys To Successful Options Trading

The last decade saw explosive growth in the options trading market all over the world.

Options are now available on almost every imaginable asset, from physical to financial assets. In fact, there are now more and more classes of options available for trading on a single underlying asset alone.

The last decade also saw the explosive popularization of options trading education both online and offline. Well known financial gurus such as Robert Kiyosaki as well as Masters 'O' Equity has been teaching about the benefits of trading options around the world, creating awareness in what was predominantly a stock trading world.

In today's complex and heavily traded options market, casualties are made every single day. Beginners are losing money much quicker than they used to in stock trading and the elusive perfect options strategy always seem so close yet so far away. So, the real question options traders today are asking is, what exactly does it take to be successful in options trading?

Here are five keys to options trading success that I have concluded after more than a decade of trading options.

1. Understand Your Trading Needs

One of the best things about options trading is that there isn't only one way of trading. If you can control your emotions and have time to trade during the day, you could choose to day trade or momentum trade options. If you are like most of us who would like to put on a trade and the sell it a few days or weeks later for a better price, you might choose to swing trade options. If you are mathematically inclined and would like to put on a position for fixed predictable earnings, you might want to study more about position trading.

Day trading, momentum trading, swing trading and position trading are the four main ways to trade options. Deciding which methodology to pursue is primarily a function of the amount of time you can commit and your inclinations.

2. Understand Your Chosen Strategy

There are also many ways to profit from day trading, swing trading or position trading options. These strategies range from simple to complex. No matter what strategy you choose to pursue, you need to fully understand the strategy; its pros and cons as well as risk profile. This includes its maximum profit and loss as well as the conditions under which they occur. Understanding an options strategy goes beyond merely mastering the calculations but also understanding how you might react to all the possible outcomes of the strategy. Always paper trade for an extended period so that you experience all its pros and cons before applying real money.

3. Choose The Right Stock

Every options strategy profit only when the underlying stock performs in a certain way and loses money when the stock doesn't. As such, no matter which strategy you decide to pursue, you need to be able to pick stocks that perform in that very way. As such, good fundamental and technical analysis skill is critical to options trading success. Technical analysis is of particular importance in options trading since accurate entry and exit points are extremely important for options, being a time sensitive financial instrument.

4. Risk Management

No matter what options strategy you decide to pursue, there is a chance of losing money. Some options strategies have limited risk while some have unlimited risk. Limited risk means that it can only lose a fixed amount of money no matter how bad things turn out. Unlimited risk means that you can lose enough to break your account. Regardless if an options strategy is limited or unlimited risk, knowing how to manage your trade and portfolio risk is critical to your long term options trading success. All successful options traders decide how much risk to take for each trade in the framework of their overall portfolio risk management policy. This will govern the number of contracts to trade (position sizing) and where to set their stop loss.
For instance, if you have a ten thousand dollars account, wishes to pursue a simple long call options strategy and decide not to lose more than ten percent per trade, you would commit no more than one thousand per trade.

5. Profit Taking Strategy

Knowing how to apply the correct options strategies to the correct stocks with proper risk management technique in place is like knowing how to fly a plane. Even though learning to take off and navigate in the air is important, it is the ability to land the plane safely in the correct destination that makes an expert pilot. Knowing when and how to take profit properly is like landing a plane. Too many beginners make the mistake of holding a position all the way from profit into a deep loss. To make matters worse, the limited lifespan of options contracts does not allow unlimited time for such losses to come back up.
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