Real Estate Innovation

Trading Options: A Potentially Good Investment Opportunity

Rather than jumping into trading real options, start by spending a few months trading options on paper. This is an excellent way to learn option trading, and although definitely not the same thing as using actual money, most experts will tell you that this is the best starting point for beginning option traders.

After you have spent some time tracking your trades on paper or with a spreadsheet, the least painful way to gain experience is to start trading options on a small scale until you build your confidence and skill. When you buy options with low prices under $2 or so, you do not need to risk much money at the beginning of your option tutorial.

An essential, but often overlooked, factor in options trading is selecting a broker. You can reduce your costs for commissions by using a discount broker or an online broker. However, these types of brokers will provide little assistance and you will need to enter most or all of your orders yourself. As you continue to learn option trading, you may find it helpful to use a broker that you can rely on to provide at least minimal guidance.

It is always best to manage your own money when trading options, so whichever broker you end up choosing, it is not wise to let them talk you into a “managed” options account. However, avoid placing all your available funds into the options market at one time. And never lose patience and place all of your money on one “sure bet” as this is an easy way to see all your funds disappear.

Plan how you will spread your purchases out during the next several months or longer. Be sure to diversify your funds among several positions and aim to buy both calls and puts. The most fundamental part of trading options is understanding that, typically, put options profit when a stock, index or the overall market goes down, while calls increase in value as equity prices rise.

It is crucial that you only risk funds you can stand to lose, what you might call “Vegas money”. Opportunities will present themselves in the future, even if you are unable to locate a solid trade with a good risk-reward ratio now.

Rather than jumping into trading real stocks, start by spending a few months trading options on paper. This is an excellent option tutorial so you can learn option trading. Although it is definitely not the same thing as using actual money, most experts will tell you that this is the best starting point. You should have an extended plan when it comes to purchasing. Spread your purchases out over several months or longer. Always pay attention to diversification and buy both calls and puts. Most importantly, always practice patience and only play with money that you can safely afford to lose.

- David Baxwell