Learning to Trade Options

One of the problems facing new traders is paralysis of analysis. There is just so much information coming at you. If you aren’t careful, you can have a severe case of information overload. You keep waiting on the last perfect piece of information that will make everything perfect.

Well, I hate to burst your bubble, but there just isn’t a perfect anything. You always have incomplete data. You always could use more information. You always worry about making a mistake. You just have to step up and try your best.

Sometimes, when the market tanks and you have a long position, you just don’t want to close out your trade, because you have a losing position. I understand, I really do. However, you don’t want to hold onto a losing position too long, because instead of a small loss, you could end up with a total loss.

I remember when I started trading, I didn’t have that much money to invest, only about $20,000. I wanted to make money fast (don’t we all have that dream) so I wanted to trade options. Because you only needed a small investment, you could trade them online, and there was a lot of liquidity in the options market. I bought the books that made me the instant expert. I understood calls and puts (that was a little hard to grasp at first). Forget about straddles and strangles. Anything with a fancy name like that had to be too sophisticated, so I just didn’t bother to learn it. (Remember, I had trouble understanding puts.)

I bought a call that was worth about $350. I knew what I was doing, (remember, I had read the book) so I loaded up and bought 10. My trade went bad, I knew that I needed to get out, I knew that it wasn’t going to get any better, so I did what any rookie would do. I panicked. I didn’t do anything until it was too late. So instead of losing about $100 on a bad trade, I did the next best thing, I lost nearly $2,000.

They say you learn from your mistakes. I tried to. I really did. The next time I had a losing trade that went really bad, I showed them. I panicked again. This time it was only about $1,000 loss. (You see, I really was improving, I cut my losses in half!)

As you can see, I was really racking up a winning record. Sure, I had some wins, $50 here, $30 there. The occasional $300 to $400 winning trade. But my losses keep coming at me, and they seemed to be bigger than my winning trades. I noticed that the transaction fees were eating up a significant part of my profits. (What profits?) I figured if I changed firms to one with a lower fee, I would be making money.

So I changed firms. Now when I lost $100 on a trade, it only caused me to lose $105 instead of $125. See, I was making progress; I had cut my losses by 20%.

Well enough about my early days in the market. I’ll get back with more about my early days in a later blog. Eventually, I’ll be able to tell you more about my successes in a later blog.