So you want to trade options. It’s your right, and I respect your preference. But for options trading beginners, it’s important to start things off on the right foot.
Strategy specifics aside, let’s get straight to it. We’re going to dive into the best way to practice options trading. Practice is the key to success in this challenging market.
Learning through courses, online programs, and books is an effective approach. But there are limitations when hands-on experience is absent. Think about how proficient a driver who has never been behind the wheel of a car would be.
Let’s avoid the fate of the armchair quarterback and get right into it. Here’s the #1 way to practice trading options broken into 5 steps.
Options Trading Beginners – Step #1: Set up paper (simulated) trading
Rarely does a day go by without me mentioning paper trading. Today will be similar. The first step to practicing options trading for beginners is to set up a paper trading account.
It’s not only for beginners. Experienced traders new to options will get lots from this approach too.
Trading options benefits from specific platform features.
Here are the platforms at the top of my list:
- Thinkorswim at TD
- NinjaTrader, and
- TraderWorkStation (TWS) at Interactive Brokers
They are my favorite places to practice trading. For options trading, the Thinkorswim platform may have a slight edge but any one of these three will do a fine job.
Options Trading Beginners – Step #2: Place trades with this basic knowledge
Stocks require you to get one thing right: the direction of the move. Trading stock options well requires you to get the timing and the extent of the move right as well. Moreover, it requires you to get them right at the same time.
“For options success, you have to be right in more ways than one.”
Why would anyone want to make life harder?
Because of the additional risk and trouble, options have a larger payoff.
Let’s look at a quick example comparing 2 situations:
Situation 1: Buy the stock.
A few of the possible outcomes include:
- The price of the stock goes up and every dollar it goes up, you make one dollar.
- The price of the stock goes down and every dollar it goes down, you lose one dollar.
- It stays the same and nothing happens.
Situation 2: Buy the call option.
A few of the possible outcomes include:
- The price of the stock goes up and every dollar it goes up, you make a dollar minus what you paid for the call option. It’s important to remember that this upwards move must happen before the option expires or else it will be worthless.
- The price of the stock goes down or stays the same and you only lose the amount you paid for the call option.
There is a trade-off when it comes to options contracts. They increase risk. However, trading them can be very rewarding if done methodically and properly.
Options Trading Beginners – Step #3: Keep practice trades small and varied
Options experience added volatility and risk. Mitigate that risk by keeping both real and paper trades small and varied.
The entire goal of trading is to improve skills and build on successful trades. The same goals apply to options trading.
Imagine having a $50,000 trading account. Even if you double it in one year, it would be nothing more than a small lifestyle win. And that will always be true unless you can repeat the performance.
The brilliance of trading is that it’s easy to scale up once you have the required skill. The only way to build skill is to practice. The only way to practice well is to trade small.
Aim to identify high probability trades for the best chance at long-term success. Focus on being consistent. Keep your trades small and varied. Let their potential give you practice and bring you profits over time.
Options Trading Beginners – Step #4: Track progress over the long term
Many traders make the jump into options too soon. Some coin-toss luck at the beginning of their trading practice has them fooled. It’s a recipe for disaster and never ends well.
Sustained trading success and failure occurs over a large number of trades.
It boils down to this:
The more trades you placed to achieve success, the better your chance of sustained results.
“Tracking your trading is a huge factor in long term success.”
Track your performance over many trades. You should be looking for over 100 completed trades for starters. Accurate tracking will provide the most clear measure of the value of the way in which you trade options.
Options Trading Beginners – Step #5: Always be learning
For long-term readers of my content, this should come as no surprise. Whether you started yesterday or at the top of your trading game, it is crucial to always be learning.
Markets, regulations and the effectiveness of existing trading edges all change. Prepare for those inevitable challenges by exposing yourself to new ideas in the trading world. Always be looking for new concepts and perspectives.
For more day trading techniques, tools & strategies, check out these articles:
- 7 Steps To Options Trading Success
- Biggest Dangers When You Trade Stock Options
- Forex Trading Platforms: Which One Is Best?
Start off your trading journey in the right direction. Follow these 5 steps for the #1 way to practice trading options.
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