Don’t Trade Options If…

Don’t trade options!

Yeah, you are reading it right. We at OptionPundit, a premium Option focused website, are telling you not to trade options!! In fact don’t trade stocks, forex or commodities also if you can’t put your heart-n-soul into it to understand how it works and what does it take to succeed in that business. Trading Financial markets isn’t easy and it will never be easy as it directly deals with money and the competition will always be tough. This is even more relevant in case of financial markets as market participants are now even more sophisticated than ever.

If you can’t afford the time and resources to prepare, persist and persevere, you will be disappointed with Options trading. Let’s dive into the details.

Options Are From Mars

Just like one has to understand A, B, C of a language before he could read, write or create beautiful stories, it is important to understand the language of options. At the end of the day, Options are just another trade tools with pros-n-cons.

Compared to stocks, which is extensively discussed and taught through traditional education system, options’ are not widely known. Most people learn about options after completing traditional education and by that time theoritical understanding of stocks is deeply rooted. It is evident in practical conversations with beginners. Almost everyone understands BUYING A CALL OPTION very easily vs. BUYING A PUT OPTIONS. And the moment, you talk about SELLING A CALL or PUT OPTIONS, the same people start looking around.

Yes, there are just two type of options CALL OPTIONS and PUT OPTIONS, and yes there are just two transaction BUY and SELL, and yes when compared with stocks, options require much less parameters to understand, still one has to learn the language of options before benefitting from it.

So if you are not willing to spend time to understand fundamentals of Options, it’s better to stay away from options.

Buy Low, Sell High

It’s natural. We are trained for thinking “Buy Low, Sell High”.

That’s how, in general, investors and traders think about underlying asset. But that’s a stock trader/investor’s mind-set, not an options trader’s. Yes, it is still about “BUY LOW, SELL HIGH” or “SELL HIGH, BUY LOW”, but the way it is done in options trading is different. It’s not right or wrong, it’s just different. Believe me, when you mix “SELL TO OPEN” as first transaction with NEW “options language”, it just becomes a tough nut to crack for beginners. And BUY and HOLD doesn’t work in options simply becuase options has different character than stocks. If you don’t have proper foundation, don’t understand the basics well, there is no reason you should jump into options trading.

So, Start it right and start it smart!

Give yourself time to equip yourself better before you dive into options trading. There are plenty of books, tools, great websites and articles that can help you in providing a good understanding of options so you can “Act & Think Like an Option Trader“.

A Ticket to Get-Rich-Quick

Options are trading instruments that provide one with good leverage. Once again, it’s not a straight forward leverage in traditional sense. Options allow you, generally speaking, 1:100 leverage as one standard option controls 100 shares. But if you are an option buyer, you can’t lose more than what you paid for. However, if you are a seller, leverage can work against you.

A majority of new traders start options trading with the expectations of hitting home run, almost all the time. It is this get-rich-quick unrealistic expectation which then turns into get-poor-quick scenario. They think that Options are something that once they learn money will start to flow automatically and that too in big strides. No, It is just not true. Options are just another tools. Tools that allow to trade market differently vs. stocks or other instruments.

Think about this- Even after learning the Language of Options, you still need to DEVELOP A MARKET OUTLOOK!! And it’s that outlook which generates money. It’s not options. Options are just more effective tools with much higher probability of profitting for THAT OUTLOOK.

Making money is a process, a process that takes time to develop and mature. When you start thinking of TRADING as BUSINESS and OPTIONS as BUSINESS TOOLS, you will see success coming your way.

Dull Saw, Sharpened Saw and The Third Point

Financial markets keep on evolving. There will be newer trading instruments, newer information, new products, new industries and so on. But at the same time, the basics don’t change. The human behaviour towards money, market hasn’t changed much over the last century. Mr market has humbled many traders, regardless of their stature. There is no point in trading the markets with a huge ego based on your past laurels. While ego might work in other areas of life, it is certainly not a helpful tool when dealing with markets. The sooner ego is in check, the better are the results.

Suppose you came upon someone in the woods working to saw down a tree. They are exhausted from working for hours. You suggest they take a break to sharpen the saw. They might reply, “I don’t have time to sharpen the saw, I’m busy sawing!” Ouch…if you don’t practice enough, you can’t make it perfect. However, spending all your time sharpening and no time sawing is just as bad as spending all your time sawing and not sharpening.  Some people may spend so much time “improving” that they never do any meaningful work.

The Third Point: Sharpening of saw is done with a pair of files and a specialized bending-pliers called a saw set. And if you mess up the filing, you can end up with a saw that’s permanently ruined! It takes some time, care, and effort to sharpen each individual tooth of a saw, and it takes a set of carefully made tools. And you also need to know a) do you really need to sharpen the saw and b) is it the right time to sharpen the saw?

At the start of the every trading day, start on the path of getting some real improvement in place. Start keeping a simple trading journal to document everything you do, and any thought or idea that crosses your mind.

“STAY HUNGRY, STAY HUMBLE” is my basic requirements when dealing with markets. There is no room for “complacency”. You can’t stay the same, you also can’t ignore the new and you also can’t turn a blind eye to your toolbox.

9 Losers, 1 Winner

There is an old saying, and a popular one, that 90% of options traders lose money. Though I have my own reservations about this comment, but for now, let’s just accept it. Is this ratio any different from any other carreer? is that any different from another job? How many managers are there for each employee in a successful corporation? Just google to find out How many start-ups survive? 9 Losers, 1 Winner!!

It is also very well documented that majority of the talented fund managers can’t beat a simple market ETF. In fact, there is a famous bet that Warren Buffet kicked-off in 2008 :

“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

So, what’s the point? It takes time and effort to take care of your money. There is still 1 winner for every 9 losers. You have to think about it. What is that 1 winner doing differently? Why is that person a winner? Are you going to spend time and efforts to be that 1 person?

There you have it. Options trading is NEW, requires TIME & EFFORT to understand the OPTIONS LANGUAGE and will have its own share of success and failure. If you can’t give it what it takes, it can’t offer you much success even if it is ONE OF THE BEST TRADING INSTRUMENT for retail traders.

It’s your turn now. What do you think? What are the pros-n-cons of Options Trading? If you were to suggest a new person, what would you tell them?

Profitable Trading, OP