Tips for Options Traders

By Tom Lidge

I've been a stock trader for the last ten years and I absolutely love the thrills of making a great trade. I find it quite addicting. Unfortunately, losing money on a trade can be just as disheartening, if not more.

If you're new to the trading world, or even experienced but find yourself struggling, I'd like to give you a few pieces of advice that I think will help you out in your quest to become a great trader. Follow these tips and you'll be in better shape when it comes to trading options.

First of all, realize the concept of time decay in options. This basically means that the further out you buy a contract for, the more of a premium it's going to sell at today since it has more time to fluctuate in terms of price.

Let's say you buy a contract for December while we're in the month of April. The stock price is at $13, and the strike price on the contract is $16. Clearly, there's a higher percentage chance that this stock will break $16 between now and December than there is between now and May. As a result, contracts with an expiration date that's further out will sell at a higher price.

Additionally, the concept of protecting your investment on an option trade is a really important one. Too many people throw all of their eggs into one basket, not accounting for the possibility of the opposite of what they expect.

Try buying a few contracts in the opposite direction. That way if you lose out big time, those contracts will win big.

While it limits your upside marginally relative to what you could have made without this strategy, it gives you the necessary protection from losing the entire amount of your investment. Many options traders are naive in not realizing they can lose it all, and therefore neglect this useful bit of information.

Follow this advice and you'll be in a much better position than most. - 23204

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