As the world of finance continues to evolve, there are an increasing number of choices becoming available to those who are looking to expand their investment portfolio or enter the game for the first time.
As part of this, there has been an increase in the need for options traders – and this is a career path that could net you the big bucks, as well as offer you a rewarding, stimulating, and ever-changing way to spend your working days.
What Is An Options Trader?
An options trader buys or sells stocks by buying or selling stock options.
In the day-to-day role, traders typically work for an investment bank or private hedge funds, managing complex capital investments on behalf of their clients.
Some of the key duties and responsibilities that options traders will face include creating options contracts and developing forecasting models to determine the best price to buy an option so that you can maximize profits and minimize risks.
Reports and analyses will also be created, and these are intended to help your clients obtain a better and more thorough understanding of their financial positions, and increase their financial value.
Many options traders gain experience trading stocks by working at an investment bank, large commercial bank, or brokerage firm.
They may earn a bachelor’s degree in mathematics or economics, demonstrating high levels of logical and numerical skills which are beneficial in this role.
How Do Options Traders Make Money?
It is important to note that, as with any career or move involving investments, there are risks.
There is no denying that embarking on a career as an options trader can be extremely lucrative – this is a major part of the appeal – but you must always keep in mind that there is always an inherent risk when it comes to speculative investing.
If an options trader works for a larger firm, such as a financial institution or a hedge fund company, they are paid a basic salary and then earn commissions from profitable trades.
If you decide to be an independent options trader, however, then you will make money directly from every successful trade, without the need to share or divide this amongst others.
Options traders who work for large firms rely on their bonuses in order to secure the big bucks but do have the advantage of a steady base income, and so overall risk is lower.
The more successful your options trading skills, the greater your bonus at the end of the calendar year; independent traders must rely on their own efforts in order to secure large, financially advantageous deals.
What Are The Traits Of A Successful Options Trader?
There are a few traits and qualities that a successful options trader will require, and these include:
Be Able To Manage Risk
Options are risky instruments, and it is essential for traders to recognize how risky they are at any given moment.
Consider the potential maximum downside of the trade, as well as its implicit or explicit position with respect to volatility in the market? What percentage of your capital is allocated for trading?
These are some of the questions traders always have to consider, and the ability to manage risk plays a major part in this.
Risk management is an important part of trading. If you’re a short-term options trading investor, you’ll often come across losing trades.
If you are holding a position overnight, your trade could go bad because of adverse market conditions, and you must be prepared to minimize the risk of any position at any time.
Some traders limit their trade size and diversify into many different trades so they don’t put all their eggs in one basket – this spreads risk and maximizes your chance.
A trader must be both a good money manager and an excellent option trader, and must also be able to use the capital they’ve been given wisely.
As an example, experts would advise against blocking 90% of your capital in one trade.
Whatever strategy you adopt, risk management and money management must be a key priority.
Be Good With Numbers
Trading in options also requires you to be quick with numbers, and confident in handling them.
Consider some of the key questions; what is the implied volatility? Is the option in the money or out of the money?
What is the break-even of the particular trade in question?
By being able to anticipate and analyze these questions, you are boosting your chances of a successful trade.
Have Plenty Of Discipline
In order to be successful in their chosen field, options traders must develop discipline.
Researching, identifying opportunities, setting the right trades, forming and sticking to strategies, setting up goals, forming an exit strategy, and executing them all require a great deal of discipline, and this means that you can never rely on the herd to tell you the truth.
You should take care to never trust anyone else’s opinion unless you have first done plenty of research of your own.
Rather than blaming others when you lose, you need to ensure that you have an independent trading strategy that really works for you.
Higher degrees may be associated with elite traders but they aren’t necessary for everyone.
You, however, need to know the market well enough to understand where you’re going wrong.
Successful traders take the time to learn the basics, study the market, and look at things from every angle before making any trades – understanding how the market works is a major part of success. T
he elite, most successful traders are not usually beginners who have taken a three-hour trading seminar on “how to get rich quick trading.”
Rather, they take the time to learn by watching the market.
Be Patient
Patience is one characteristic all options traders share.
Patient investors are willing to wait for the market to give them the right opportunities, rather than trying to take advantage of every market movement – they know how to hold their nerve.
Traders often sit idle and watch the markets, waiting for the perfect moment to enter or exit a position, and are often working hard even when this appears not to be the case.
By contrast, amateur traders tend to struggle to control their emotions and will be quick to enter or exit a trade, as well as impatient to get things done.
Develop A Trading Style
Each trader has a unique personality and should adapt his/her trading style to suit his/her personality – this will make it easier to maintain.
Some traders may be better at day trading than swing trading, where they buy stocks and sell them later when prices move in their favor, while others may be more suited to position trading – this involves developing trading strategies to take advantage, for example, of time decay and volatility.
Others still may be better suited for swing trading, where traders bet on price movements over periods lasting five to thirty days.
Be An Active Learner
Conventional wisdom suggests that about 90 percent of options traders will lose money.
What sets successful traders apart from average ones is that successful traders are able to take advantage of their losses and use them to improve their trading strategies.
They practice until they learn the lessons of the trade, understand the economic fundamentals behind the market, and see the market behavior from the perspective of an expert.
The financial markets are always changing and evolving. You need to know what’s going on and how it all works so you can make informed decisions.
If you want to become a better trader, you need to become an active learner.
You will not only become good, but you will also learn new things that others might not notice or may overlook.
Be Flexible
Successful options trading relies heavily on flexibility from traders.
You cannot stake a position on the market but must follow the market or leave it if it isn’t the kind that suits you.
You must accept that losses happen and that they are an inevitable part of trading; acceptance rather than resistance is paramount to understanding, clarification, and ultimately winning and enjoying healthier profits.
Routes To Investing
Before taking a closer look at options trading, in particular, it is worth looking at the main routes to investing – having a good overview of these is important to allow you to really master options trading.
Stock Trading
This involves trading individual stocks, commodities, or ETFs (Exchange Traded Funds).
It may seem intimidating at first because you don’t know much about investing.
However, once you start reading about stocks as a beginner, you will soon learn the fundamentals of investing.
Once you feel comfortable understanding what stocks do, then you can move on to other products.
Managed Account
Many people opt to open up a managed account instead of opening up their own trading account.
Managed accounts usually charge higher fees than self-managed accounts and they usually offer less flexibility.
They also don’t provide any advice or guidance either. Some people prefer not to deal with this kind of hassle and just trust someone else to handle everything for them.
They often end up sacrificing control for convenience though.
Futures Trading
This option involves trading future contracts. By far, futures trading is more complex than options trading.
Anyone who wants to learn about futures trading needs to learn about derivatives and futures contracts.
Index Fund Trading
Indexes are basically securities designed for investors who aim to invest in a broad spectrum of assets like stocks, bonds, commodities, and currencies.
Most index trackers are traded on regulated exchanges.
Investors can enter into forwards, futures, and options contracts with respect to various indexes, depending on their objectives.
Cryptocurrencies
Cryptocurrency has grown exponentially since early 2017. At present, cryptocurrencies represent one of the most volatile asset classes due to high risk and large rewards.
There are so many different types of cryptocurrency out today that one person could spend years learning all there is to discover.
While some are quite popular such as bitcoin, only a few are considered safe investment opportunities.
You should research carefully before putting your hard-earned cash where your mouth is.
Options Trading
Options trading is a great alternative to traditional markets and cryptocurrencies.
People who enjoy playing the financial markets can now play using different strategies and techniques.
Whether one likes it or not, options trading will always be here. It is easy to trade and gives you freedom when making financial decisions.
What Are The Different Types Of Options?
Whether you are an independent trader or looking to make a career out of options trading, understanding the basic knowledge is important.
There are two main types of options that can be traded: calls and puts.
Calls offer an option holder the opportunity to purchase shares (also known as American stock) at a specified price, allowing the holder to benefit if the underlying asset increases in value.
This means that a call can increase both earnings per share and dividend payout by selling existing shares at a high price.
A put gives holders the chance to sell at a certain price, but with no obligation and no guarantee, making the profit potential less than a call option.
Put buyers do not have this same risk, but receive the upside benefits if the price of the underlying assets fall.
When buying either a call or a put option, the buyer receives the strike price without any obligation to buy or sell anything, at expiration, which means that the contract expires worthless.
However, there is often a small premium paid for each option, meaning that in most cases the buyer gains.
How To Succeed In Options Trading
The goal of becoming a profitable options trader is simple: Make money. That being said, though, not every investor gets results.
Many people who start trading options end up losing money. What it comes down to is learning how to minimize your risks and maximize your rewards.
Here are some tips on becoming a profitable options trader.
Start Small
If you’re just starting out, don’t go for penny stocks and start with trades at low volumes.
It may seem appealing because you feel as though you aren’t risking much, but you will find yourself constantly chasing your tail and not achieving your goals.
Instead, focus on starting with a large amount of capital – at least $10,000. Don’t try to play against the big boys.
Use other investors’ mistakes and learn from them. Once you have mastered the basics, slowly work your way into higher-risk investments.
Stay Off Of Margin Calls
Options margin accounts can add serious complications to the game. For example, when using margins, you are required to keep a minimum cash balance at all times.
Depending on the type of account used, margin requirements vary, but a common option is between 2% to 10%.
If you can stay within those limits, you will get more leverage and should be able to trade more aggressively.
But what happens when your trades go wrong? Let’s say you buy 100 shares of XYZ Company for 1$ a piece but its price rises to 2$.
Do you still have enough money in your margin account to cover the spread? Unfortunately, no!
So where does this lead us? You’ll need another source of funds to meet your margin calls.
You could borrow money from a friend or family member, or even use loans online to get extra money.
Whatever method you use, if something goes wrong, you’re going to lose everything.
Now, what were the chances of that happening? Probably pretty slim.
Therefore, if you want to get started in the world of options trading, it is a good idea to avoid margin accounts until you really know what you are doing.
Know Your Market
You must understand the fundamentals of the market before getting involved with options trading.
Learn about the basic functions of markets such as supply/demand, liquidity, and volatility.
These concepts alone will go a long way towards helping you make better decisions while playing.
As always, remember to research your market thoroughly before jumping into the real world.
Learn How Options Work On Real Stocks And Not Fake Ones
Options trading is based around three core principles: time, credit, and money.
Time refers to the expiry date set by the trader; credit allows him to take full advantage of his position during the life of the contract, and money is used to pay off any winners and fund any losses in the event of a loss.
In reality, most traders choose their own expiration dates which range anywhere from 30 days to several months.
Traders can also use fixed-for-a-day contracts which allow traders to profit off changes in stock prices over a single day.
Because of these features, investors can effectively short sell futures without actually owning the underlying asset.
Don’t Trade With Unsuitable Software
While there are many software programs available, nothing beats having an experienced professional guide you through your first steps.
A skilled options trader will help you determine which strategy works best for you and can guide you through each step along the way.
If you’ve ever tried to do so on your own, you know how frustrating it can be.
How To Become An Options Trader
Now that we have taken a closer look at the basics of options trading, it is time to consider the ways and paths into this. The main options include:
Get A Bachelor’s Degree
While options trading doesn’t require any formal education, investment banks are more inclined to hire people with bachelor’s degrees.
If you want to become an aspiring options trader, you can benefit from studying finance-related fields such as math or econometrics in college.
Alternatively, you might consider taking classes that teach finance and accounting if you don’t already know them.
Online schools are also a good option.
Open An Account On An Options Trading System
Simple entry and exit guidelines are appropriate for beginners who want to trade options.
There are different tiers of trading systems that require varying amounts of startup capital, so be sure to check out each one carefully before investing any money.
Some require you to agree to certain terms before you can trade options.
Other trading systems allow low-risk accounts access not just to the widest variety of stocks but also to the widest variety of options – doing your homework is key here.
Select Options And Predict Their Strike Price
When deciding between buying a call option or a puts option, you need to consider your prediction for the stock’s price.
When a stock price rises, it means there has been a call option sale or a buy option purchase, while a stock price that is falling means a call option purchase or call option sale.
Get Experience
If you want to increase your experience and expertise by investing your own capital or making investments for relatives and close friends, then start trading options, increasing the value and number of trades you make slowly over time.
Experience can be super valuable when looking to work with brokerage firms and private clients, and could just seal the deal for you.
Final Thoughts
As mentioned above, options are a great choice both in terms of risk level and potential return.
As long as you pay attention to details and follow simple steps, you won’t go wrong.
Remember to set aside enough time to study up on all aspects of the market before getting started.
Once you’ve studied and learned everything you need to know based on what you heard or read online, it’s time to get out there and start practicing!
