Understanding Options Trading

Options Trading

Why Most People Fail at Options Trading

Executive Summary About Options Trading By  Jason Ng

In options trading, as in everything else in life, only a very small percentage of people make money consistently from options trading. This is true even amongst beginners who attended the same options courses. Yes, even with participants of the same options course, some will actually make some really good profit from options trading while most will not. I explored the reasons for failure at options trading and narrowed it down to two main reasons; 1. 2, Lack of a robust trading mentality.

Let's admit it, most beginner options traders are no professionals. Without an objective and proven system and framework, no non-professional options trading beginners can hope to generate any consistent return.
Now, having that kind of "designed for beginners" trading system is merely the foundation of success in options trading. What really determines long term success is the trading mentality of the traders themselves. What's the use of a trading system when the trader is incapable of following rules? A strong trading mentality comes not by nature. Yes, sadly, there are people who should just stay away from options trading.

The only way for most beginner options traders to become successful is to go through an extensive paper trading mentoring program over a significant period of time. Paper trading helps builds confidence if the trading system is good and over time convinces the trader that the system makes better decisions consistently than they can. Sadly, most options trading courses are one weekend long these days. Real money triggers emotions which spoils trades if faith in the trading system has not been built up over a period of paper trading.

How People Lose Their Shirts in Options Trading

You must have heard horror stories surrounding options trading before. The first of these is that some options traders trade options just like they trade stocks; buying call options with their whole account on that one "hot stock."

Most beginners to options trading do with call options exactly what they do with stocks when they have a "hot tip"; throwing their whole account into that single "hot" trade. Professional options traders like me only enter a single position with money we can afford to lose. The other reason is trading credit spreads or naked option writing without using stop loss.

Many options beginners were taken in by the apparent "free money" phenomena of writing naked options positions unaware that most of these credit strategies have unlimited loss potential.

For instance, if you wrote call options (shorting call options), you would make a fixed premium in profit if the stock went downwards or sideways. When you write call options, your position will make an incrementally bigger loss as the stock price rises! Yes, most options trading beginners trade such unlimited loss potential credit spreads with stop loss points but most of them give in to emotion when it's time to stop loss and hold their positions beyond their stop loss points in hope that things will turn around, which most often, they never do.

Professional options traders always trade unlimited loss potential positions with an AUTOMATED stop loss point. Physically executed stop losses are stop losses that rarely gets executed. Buying options with your whole account and trading unlimited loss potential options positions without stop loss points are the two main reasons most options beginners lose their shirt.