Options Trading Education

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Options Trading Education: Three Tips to Save You From an Options Nightmare

By Dr. Steve Sjuggerud, President, Investment U
Friday, June 6, 2003: Issue #245

Sammy Sosa and options trading – that’s all anyone has talked about here in Chicago over the last three days.

I’m in Chicago speaking at a conference on options trading education. After speaking with a good deal of the 200 or so people milling around, I’d say that over half of the attendees are not yet ready to trade options. Chances are if they start trading now, they’ll lose a lot of money very quickly. And that’s a shame, because they (and you) can avoid huge losses trading options by taking the three simple steps I outline below.

The Potentially Most Profitable–But Riskiest–Game Around

Yes, it is possible to make ridiculous profits trading options. Yes, it is possible to make 1,000% or more in less than a month on one trade. And even over the long run, legendary options traders like Victor Sperandeo have brought home extraordinary returns (the liner notes to his book say he brought home 70.7% a year for a dozen years without a losing year).

But it is also possible to lose a LOT of money. For example, there are some options strategies where you can even lose substantially more than you put into that option, which could never happen with a stock. I would bet that most of the attendees are not aware that you can lose more than you put in with some strategies.

We All Make Stupid Mistakes When We Start…

My fear is that many of the attendees here will lose a lot of money up front out of ignorance–by making stupid mistakes.

In hopes of trying to make an impression, I shared the big mistakes I made when I started trading options I told of how I ended up paying $7 for a $4 option (I used a “market order at the open”), and I told of how an option I bought one day was worthless the next-it was an “out-of-the-money” option.

The point of sharing stories like those was to show the attendees that everyone makes mistakes, and to help prevent them from making the same mistakes. But I don’t think the message got through.

These stupid mistakes cost REAL money. But they don’t have to

Three Options Trading Education Tips To Save You From An Options Nightmare

If I could hammer home one message to the attendees, it would be this:

“Wait! Don’t be in such a hurry to dive right in! Do some homework first!”

In the blind pursuit of huge gains right now, chances are you’ll start out with huge losses. These huge initial losses can largely be prevented by taking a month to get educated on options trading by doing these three things.

Just take one month. Four measly weeks. And educate yourself. Do the following:

1. Paper trade options first.

Everyone makes mistakes at first in options. When you make a REAL mistake, you lose REAL money in options. However, when you make mistakes ON PAPER, you only lose money ON PAPER. Paper trading is trading as if everything were real, except you don’t have real money on the line.

The outstanding brokerage firm OptionsXpress (www.OptionsXpress.com) offers lifelike paper trading. Open a “paper” account with them, and paper trade for a month first. It’ll get your mistakes and anxieties out of the way, and it won’t lose you a penny in the process.

2. Learn as much as you can about options trading in that month.

Unfortunately there are very few good books about options out there. And even worse, there is a lot to learn. One book that is extremely readable is The Option Advisor by Bernie Schaeffer. I must tell you that I have heard from attendees that people have lost money following Schaeffer’s trading services, and that the Schaeffer organization bombards you with e-mails if you sign up for something with them. I can’t confirm or deny either of these. But I can definitely tell you that I have read a lot of books on options, and that Schaeffer’s book is very readable, and may be the best options book around for most people.

3. If you decide to try a trading service, go on a few dates before you get married…

There’s no sense in throwing $1,200 or more away on a trading service only to find it’s not for you, so make sure you can test things out first. Generally, you’ll have to pay the upfront fee, but most options-trading services will have some sort of guarantee, whether it’s a 30-day money-back guarantee, or a pro-rated refund policy (if you subscribed to a $1,200 service and canceled a month later, you could get $1,100 back), or both. Make sure you are clear on the refund policy. And try the service out for that month

This way, you can at least have a few dates before you get married. During that first month, paper trade the first few trades, to make sure that the trading advice is articulated well (is clear), and that you know when you’ll get in and out of a trade.

Start Small To Win Big

Please, wait. There is no hurry. It’s only four weeks. The options and the potential rewards will still be around in four weeks. The four weeks you invest in yourself through options trading educationby reading, paper trading, and “dating” a trading servicewill undoubtedly pay off substantially for you in options.

If you decide to ignore my advice, that’s fine. But remember that I am coming from experience. I have nothing to gain here. And you have a lot you could potentially lose

One last piece of advice Even after the month of paper trading has passed, I suggest starting small at first. Start with just a single options contract here or there to get your feet wet, before you move on to larger trades. Best of luck.

Good Investing,

Steve

P.S. I forgot to mention the “Sammy Sosa’s illegal bat” chatter in Chicago. It’s interesting. Wouldn’t Andre Agassi recognize if his tennis racket was a little different? He brings a dozen identical rackets on the court, and then somehow picks the “best” one, as professional athletes can tell even the slightest differences in equipment. Here in Chicago it feels like the O.J. story the evidence points to guilt, but nobody can even consider that possibility. We’ll know the verdict and the sentence very soon…

Today’s Investment U Cribsheet

A good start on your options trading education journey would be the two previous Investment U e-Letters about options: #131 – Understand Options in Under Five Minutes and #225 – Options Trading: Myths and Realities.