During these years of teaching, some students and community members had put me several questions, and here you have a list of the most common ones (and my answers).
1. Is it easy to learn how to trade options?
Yes, it is easy to learn options trading. It is easy to understand their principles and how they work. Like in any topic, as more effort you put into it, the faster you can learn. I can tell you that stock trading is easier: you buy it and expect to sell it at a higher price … in options trading, not only price movements impact options pricing, but also time, implied volatility, etc. But, if you ask me, is it easy to trade options consistently? I will tell you (to be fully honest), no it isn’t! But you can reach this level if you have the right tools (knowledge and manage risk properly). You can skip a lot of trial and error and grow faster on your path if you have the right mindset and a good coach. Yes, this is true!
2. What are the best books to learn options trading?
Before I suggest any book, I will suggest free education resource available to everyone:
https://www.cboe.com/education/ Here you can learn the basics of options!
There are a lot of books you can learn the basics: here you have some
– Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, by Dan Passarelli
– The Options Playbook: Featuring 40 strategies for Bulls, bears, rookies, all-stars and everyone in between, by Brian Overby
And the bible of Volatility based trading (only after you reach a comfortable level and want to move forward):
– Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Ed, by Sheldon Natenberg
3. What is the best options strategy?
There is not a “best strategy”. Options are so flexible that they allow a huge variety of options strategies we can apply in several market conditions (related to the level of IV – Implied Volatility). Options pricing depends in great measure on their implied volatility (apart from other factors). Additionally, there are directional trades (like when we trade stocks) and income trades, where we expect none or minimal market movement! Another factor is the trader style and risk tolerance. Are you able to trade naked options? Or do you only accept to trade limited risk strategies? Another factor to decide is which assets to trade (stock, ETFs, etc). Stocks are usually more volatile because they announce quarterly results which are times of higher volatility. ETFs are more stable… so, a lot of factors that influence which trading strategies to apply!
4. Can I double my account in 6 months’ trading options?
Over the web, I see a lot of sales pages advertising how to achieve 200% returns on options trading. Or posting past options trades and their profitability and a minority of losing trades. Or many options sites that advertise “10%/month” or “5%/week”. They might succeed in doing that for a limited period of time, but it’s only a matter of time until they blow up their accounts. Making money with options is easy. Doing it consistently is much more difficult. People see all the hype and think it is an easy task. To become an engineer you have to study for 4 years and after that to become a good one you have to have 5 years of practice! The same applies to options trading!
But to me, transparency to my students and followers is more important! That is why I am posting pictures of the trading platform with fill prices as they happen. If any trade is a loss it will appear to everyone. It is part of the business! We do not know where the market goes the next day. That is why to achieve consistency we need to manage risk, select the right strategy to apply in the actual market conditions!
My code of conduct is to not promise what I can’t or what is not the truth! And I will not mislead my Patrons. As stated in my Patron service description, I cannot promise any get rich scheme! I can promise that you will learn from me. From my trades, according to my trading style.
5. In resume, what can you expect when you start trading options?
Like in every topic or job there is a learning curve. As more effort and study you put into the topic, the more knowledge you will get into and you can reach better decisions along with your trading. But, it is from common sense that:
The majority of options traders lose more money than they make. The figures commonly referred tell that about 90% are ending up losers and after some period quit trading, but the most important here is that they do not research why they end up failing. Probably if they understood why they fail, they will move to the positive side of the equation!
Only a small fraction of retail traders are consistent. Given the point above, the key to profitability is consistency! The numbers given above will get smaller if the analysis is extended to a 3 to 5 year period. Don’t get discouraged! I have passed that stage (but I had to)!
The best way to start is by opening a Demo account. I always recommend my students to trade demo for 3 to 6 months and after gaining confidence moving to live trading. This way you learn how to enter orders, adjust trades, and more importantly learn from your mistakes without losing real money. If you move to a live account, start small and increase when you increase your confidence;
Expect to have losing trades and live well with it. Too many people quitting after a streak of 4-5 losing trades. Losing trades and have a negative month is part of options trading. The trick is to keep the losses as small as possible and move to the next trade and expect to be profitable. If you have confidence in your strategy and know that is profitable in the long-term, continue to do it under the defined risk limits;
Don’t make your options trade your main income activity. If your goal is to be consistent expect smaller profitability (on average 5% a month is excellent!). If you aim to get rich in a single trade you are gambling not trading to reach consistency!
