Options and trading psychology:
A complete guide for beginners with strategies to improve your wealth using financial leverage and money management
Options trading:
Easy investing strategies to make money online with options trading. Money management techniques to improve your investments and establish a solid passive income
Introduction
It is an occurrence that is almost as inevitable as the sun rising from the east tomorrow. At some point in everyones lives, people become extremely interested in learning how to make money from the financial markets. These days the markets are even more varied than ever before and theres no shortage of options for you to consider. You can trade currencies, stocks, futures, commodities and curiously, options.
Perhaps youve been intrigued about what options are exactly or perhaps youve been trading them for some time now and havent quite mastered them as yet. Whatever your reason for picking up this book, youve come to the right place. You see, options provide traders the one thing they desire more than anything else: The ability to limit downside risk drastically.
This sounds counter intuitive. After all, isnt making money a traders biggest goal? Its true that the return on trading capital is an important metric but this is a result of doing a number of things. Returns come to you only when you manage to do a number of things correctly. One of these things is your technical strategy. There are many different ways of analyzing the best technical approach you need to take when trading.
You could begin by looking at the instruments on offer. Trading stocks is very different from trading FX (Forex or currency pairs.) Similarly, trading futures is very different from trading options, despite both instruments being derivatives. Ultimately, it all comes down to which instrument youre comfortable with. How does their behavior affect you mentally? Can you handle the gyrations in price?
Some instruments move a lot faster than others. Some stay moribund for long periods of time and then jump all over the place. Some never cease to move and so on. This characteristic of price movement is referred to as volatility. Volatility is something that is both a friend and enemy to the trader. On one hand, an extremely volatile instrument, that is one that moves in any direction quickly, has the potential to reach profit levels faster. On the other hand, youre just as likely to be taken out of a perfectly profitable trade because the price moved too much.
Volatility also brings us neatly to the discussion of the second most important thing you need to execute to trade successfully: Risk management.
Risk and You
Its easy enough to place a trade these days. Gone are the times when you had to pickup a phone and yell at your broker to place and order of X for Y shares and wait for them to report back to you the price at which you entered. All you need to do if you wish to trade these days is click a button on the software your broker provides you.
This is both a good and a bad thing. The click of a button has made it easier to be able to enter opportunities at a far quicker rate than ever before. It has also made it easier to enter into less than opportune ones where you simply misread conditions. Mistakes occur all the time in the markets and some of the most famous crashes, or flash crashes as theyre increasingly being referred to as, occur due to a fat finger error on the part of some trader somewhere (Chen, 2020 ) .
Risk management is what saves you from these messes. The problem with risk management is that, depending on the type of instrument you trade, theres only so much you can do to reduce it completely. For example, when trading stocks or FX, you can reduce the amount of money you risk per trade to a bare minimum but you still have to place money in the market. You still need to risk a certain amount of your capital and you are locked into betting that price will move a certain way.
Directional risk, as this is referred to, is one of the things that most traders accept as a fact of life. The truth is that this doesnt have to be the case at all and this is one of the things youll learn in detail in this book. What if you could remove directional risk completely from your trading? In other word, what if you could place a trade where you could make a profit whether the market moved up or down?
Options and Risk
Most beginners to options are attracted by the prospect of paying low prices for an instrument that allows them to bet on the stock price. Ill get into the basics of options shortly but understand that this is just one of the many advantages of options trading as youll see. Options can be both simple and complex to trade and that is where their beauty lies.
Your options trading strategy can be as simple or complex as you like. You can trade the Greeks to your hearts content or you could simple trade basic strategies that are just as profitable. If you dont know what the Greeks are and think that it refers to the country, dont worry, you dont need to know about them to trade the strategies in this book.
My aim with this book is to open the curtain and show you that a far better way of trading exists. Traditional trading is all about figuring out what is going to rise or fall and then bet on it. If you win, you win and if you dont, you dont. What if you could drastically minimize your losses when you lose and fully gain your profits when you win? Wouldnt that turbo charge your results? This is the power of trading options!
In addition to learning all about options, youre also going to learn about a few basics with regards to the market. You see, options dont exist in a vacuum. Most traders assume that once they learn the strategies, all they need to do is plug them in and theyll automatically make money. This isnt how it works unfortunately.
Market Fundamentals
The methods you use to analyze the markets fall into two big branches: Fundamental and technical. Usually, traders align themselves into one of two camps and swear by it for the rest of their lives. The successful ones understand the strengths and weaknesses of both approaches and use them appropriately depending on their plans.
This book is going to give you an excellent base from which you can understand both approaches. In addition to this, you will also learn the strengths and weaknesses of both. After all, if you dont understand what works best according to the situation, how can you expect to apply the best analysis techniques when the time arises? This is also the reason why you will spend time learning about these techniques prior to diving into the best options trading strategies.
It might seem tedious to you but it is crucial that you spend time understanding these fundamentals before looking at options. A lot of options strategies assume prior knowledge of market fundamentals and as such, youll understand them a lot better once you grasp the market assumptions they make.
If all of this sounds too much and if youre thinking that perhaps options trading is best left alone, dont worry. This book is designed to give you a step by step introduction and will walk you through everything you need to do. By the end of this book, youre going to have everything you need in order to trade options successfully.
More importantly, youll also know how to keep the money you make, something which a lot of traders struggle with or outright ignore when it comes to trading.
So, excited yet? Lets jump in and take a look at what options contracts are and how they work!
Chapter 1. What Is Option Trading?
An option is an agreement that enables you to purchase and sell specific stock trading amounts at a particular price within a particular trading time before the date of expiration avails. Options exist in two kinds: call options and put options.
