Have you seen screenshots of people making millions of dollars with options? Not all options gains are like that, but allocating a portion of capital into options trading can help you realize more gains and hedge against risk. While risky trades capture the headlines, options traders can use less risky strategies that may pan out well. This article will reveal some useful tips to know if you want to become a successful options trader.
12 Traits and Characteristics of a Successful Options Trader
Want to know what it takes to become a successful options trader? It starts with the individual, and developing these traits will help.
Always Be Willing to Learn
The top traders continuously learn from books, articles, videos, podcast episodes and other content sources. Building knowledge gives you more expertise you can use with every trade. If you learn a little each day, you can separate yourself from the pack and get higher returns.
Plan Your Trades and Stick to Them
Know your entry and exit prices for every trade. Create an exit plan and stick to it so you don’t lose too much and can secure gains before they vanish. You might miss out on more gains, but it’s important to take an acceptable gain and not let emotions sway you from the plan.
Develop Your Own Trading Style
Figure out which options trading strategy works best for you. Long calls and puts have more risk but a higher potential reward. Option spreads, which involve buying and selling options on different strikes simultaneously typically have higher probability of profit, but cap potential reward.
Be Proactive
You are responsible for your own success as an options trader or professional in any industry. Take it upon yourself to learn more about your industry and anticipate how you will respond to certain scenarios with your positions.
Learn to Manage Risk
Options trading is risky. You can put money into options, but you shouldn't invest your entire life savings. Traders should decide on a percentage of their portfolio to invest in options and not exceed that number.
Be Good With Numbers
Fundamental and technical analysis both involve numbers. Looking at chart patterns and reading earnings reports are critical skills for traders. Become comfortable with numbers and understand what formulas mean instead of inputting numbers into an online calculator.
Backtest Strategies
Traders use criteria to make decisions in the present. Many options brokers let you backtest your strategies to see how well you would have performed with the same strategy a few years ago. Backtests aren’t perfect, but they indicate how you would have performed in the past with your current strategy.
Make Your Own Decisions
Don’t make a decision based on an online forum, an analyst’s opinion or a media article. Understand the setup you want in an option and what works for you. Each person is different and has their own risk tolerance.
Study the News and Market Trends
News and market trends can tip you off on how stocks will move. Be attentive to earnings dates and releases of important economic reports.
Celebrate Wins and Learn from Losses
Options traders often beat themselves up for not staying in a trade longer to realize more gains or from a bad loss. Any gain is a good gain, even if it is only 1%. Traders should celebrate small wins and use losses as learning experiences instead of getting bogged down about them.
Keep a Trading Journal
Jot down your thoughts and track your investments to understand what you thought each day and how you performed. Going back to this journal can reveal insights about your emotions, risk tolerance, strengths and weaknesses.
Take Your Time and Be Patient
Don’t rush into a trade. Rushing can put you off balance and result in bad trades. Take your time and wait for an opportunity that aligns with your criteria.
How to View Options as a Trader
If you want to get started with options, you need the right mentality. Viewing options with these perspectives in mind will help you as a trader.
Options Should Be Seen as Complementary to Stocks
Options traders shouldn’t exclusively trade options. These derivatives can yield higher returns than stocks, but they have noteworthy consequences if you get the timing wrong. Stocks are more forgiving.
Options Can Help You Win the Game
Options can get you closer to your portfolio goals. These assets can appreciate substantially in short periods of time, but not every options trader takes that type of risk. Some options traders prefer to sell covered calls and cash-secured puts to receive premiums and minimize risk. You can use many ways to trade options instead of going long with a call or put.
Traders should look at their finances and consider their goals before trading options. It’s easy to overdo it and take on unnecessary risks if you are not clear about your goals and how options can complement them.
Options Can Improve Your Portfolio Diversification
Options trading gives your portfolio extra assets that can protect your portfolio from downturns. Buying a protective put can shield you from losses if your favorite company reports dismal earnings. Options are a great way to diversify your portfolio, but they should not become your portfolio.
Each investor should assess their risk tolerance and decide on the maximum amount or portfolio percentage to allocate toward options. Starting with a few hundred dollars is a great way to test the waters and learn options trading strategies and best practices with less risk.
Becoming a Skilled Options Trader
Options traders have many ways to make money. They can profit from bullish and bearish markets. Traders can capitalize on earnings reports, economic reports and other news items that long-term investors may overlook. You shouldn’t put your entire portfolio into options, but allocating some of your funds and growing your account on the side with options can be fruitful.
Frequently Asked Questions
Can you make a living being an options trader?
You can make a living as an options trader, but it isn’t easy. Options traders use technical and fundamental analysis to guide their decisions.
Can you trade options with no experience?
You don’t need to work in the finance industry to trade options, but you should trade stocks first to get some experience
How long does it take to learn options trading?
It can take a few months to learn options trading, but the best traders never stop learning.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.