Some of these would expire worthless and I would make the $2.00 but some would go against me and I would take the max loss. Now I learned how to manage those positions and make the $2.00 on my winners consistently and only lose $1.00 or less at most! Trades that take on too much risk compared to reward aren't going to work over time.
Controlling risk is the most important part of trading. It's essential to make good consistent gains but it's more important to have very small losers compared to your potential gains on your winning trades.
The best advice I can give to beginning traders is the following points.
- Find as many successful traders who have been around awhile and learn exactly how they trade.
- Learn as much as you can about each of their trading styles because what one person does might not work for you and vice versa.
- Learn strategies that make sense! If you're going to buy options make sure they're deep in the money.
- Have a plan to get out and minimize risk. In other words, know what the worst case scenario is before you even enter the trade.
- Make sure you can make enough on each trade to justify being in the position. In other words, if your think there is a 50% chance you will win a particular trade and you can make twice as much as you're risking, than that makes sense!
- Learn position sizing! Never ever risk more then 3-5% of your portfolio on any one trade. I never risk more than 2% and that is very rare. I usually risk.5% of my account per trade.
To sum it all up, there are many ways to make extra money. I believe trading is one of the best. It's rare to find an opportunity that can have a plan behind it where are the scenarios both positive and negative are understood. If the good vs. bad scenarios make sense with that plan than that's a plan that will work over time.
You can also start making money fast by buying options. The most important part of option buying is you have to have to know exactly which options to buy. You don't want to buy the wrong options because you'll lose all of your money!
Option Buying
We all want to make money fast. Luckily there are ways to do it it's simply learning what they are and how to apply them. Many people say options are risky, which they are if you don't understand them.
• If you understand options you can use them to reduce risk and maximize profit.
• If you like to trade directional or trend trade there is no better way to do that than options.
• Lastly if making huge explosive gains in your trading account interests you then you need to learn how to buy options correctly. It is the best way to make money fast.
For example, buying an option that has little chance of ever being worth money doesn't make sense. The sad part is people do this all of the time because those options are relatively cheap.
There are two components of an option. They are the intrinsic value and extrinsic value. Let's begin defining them both
• Stock xyz is trading at $60.00.
• The $50 call with 100 days until expiration is trading for $11.00
The intrinsic value of that option is $10.00 because the difference between the price of xyz and the strike price is $10.00.
The extrinsic value of that option or time premium is $1.00 because that is the extra premium paid for the option that has no real value.
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This is a good option to buy because it is way ITM (in the money). You don't want to buy options with a lot of extrinsic value. Those are the ones you want to sell.
If you bought this option you would begin to make money as the stock begins to rise because it has a high delta (rate of change of the option). This option would make money fast because it would move quickly in price with the stock.
Let's look at another example to bring home the point of the kind of options you want to buy.
• Stock xyz is trading at $60.00
• The $60.00 call is with 45 days until expiration is trading for $3.00
The intrinsic value is $0.00. It has no real value because it's OTM (out of the money)
The extrinsic value is $3.00. This is the type of option you want to sell because every day that passes that $3.00 time premium paid will decrease.
If you bought this $60.00 call you would need xyz to rally passed $63.00 at expiration to make money.
So, the strategy I recommend is to buy ITM (in the money) options with a delta of at least (.7) or higher and at least 60 days until expiration. Of course this must be accompanied with a sound trading plan to minimize risk by using stop losses and hedging techniques.
If you want to make money fast then this type of strategy should definitely part of your portfolio because it allows you to take a little risk and make large gains.
In any trade you need to have defined risk. The best way to accomplish this is by having a specific plan for your trades before you're even in them. People who succeed in trading don't allow their emotions to come into play.
If you have money in the markets whether you're managing it or letting someone manage ask yourself this very important question. What is my overall risk and when do I plan to take my profits? If you don't know the answer to that question please learn how rich people invest their money!
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