Over the past 2 years I have been trading stock options.  After the pandemic it was easy to make money regardless of what anyone did.  Stock prices dropped quickly and the road to recovery was very lucrative for many traders.  Lately, it is very different.  Perhaps it is more like before the pandemic?

Here are some notes about Options Trading from my experience.

  • Decide on an amount you can lose in a day.  Then multiply it by 3.  Most platforms will take a day to clear your profits after selling options.  Having three times your planned daily budget is essential if you intend on trading every day.
  • Use a few accounts.  After you profit from trades move the profits to another account.  Keep just your planned budget in the main account you use for trading options.  This also becomes crucial when the tax man comes to see you.
  • Choose options from stocks with a high price. SPY is very common for options traders.  The price was $476 today.  a 1% move either way is nearly 5 dollars.  Buying options guessing on one percent swings in SPY can have healthy profits.
  • Going Long with options will hog your available funds.  Long bets on options seems only logical to do after major highs/lows occur.
  • Do your own research when buying any stocks or options.  If someone asks you why you bought something you should have an answer.
  • Set a Profit Threshold and stick to it.  After the pandemic my threshold was 300% gain.  I would sell it and forget it – that was the rule.  I broke the rule a few times for the better.  Sometimes it didn’t work out.  As time goes on your threshold should go down as your profits go up from more consistent gains.  Sometimes you ride the wave up and it comes crashing down.  Learn to take profits when you can.
  • Understanding coverage.  If you buy calls then you can also by puts to cover yourself.  In most cases one of your bets will be a loser which you have a set cost.  You have coverage with your put if your call goes sour.
  • Stay away from long shots.  If your option contract price is less than 25 cents then it is very risky in my opinion.  These bet are either great payoffs or total duds that you couldn’t get any money back from.
  • Always try to sell your options contracts even if you know they will most likely expire worthless.  There will be a day when you get bit.
  • Pay Attention.  If you have active options bets out there then you have to keep your eyes on it.  Alerts can help but can be delayed or not noticed in time.
  • Don’t get greedy.  Doubling down on losing options usually does not end well.
  • Most importantly, options trading is basically gambling.  I do believe there is a truth and rhythm to it though that takes away much of the risk.
  • Did I mention be prepared to lose money!

Common Questions and Answers:

Q. How much do you need to trade options?  A. I think $500/day budget is a good start.  Less than $500 and you’ll likely get discouraged and start to buy risky options.  Gradually increase your daily budget if you are doing well.

Q. How many contracts should I buy?  A. In my option you should try to buy at least 10 contracts.