What are Options?

Options are financial derivative instruments that specify the terms of a contract between two parties (a buyer and seller), to be executed at a reference price in the future.

Several financial assets or instruments can be traded as options. These include stocks, exchange traded funds (ETFs), currencies, commodities, spot metals, etc. Some of the characteristics if options include the following:

1)      There is a reference price that is set for the future execution of the options trade. This is known as the strike price, and it is not adjustable. It serves as a pricing tool to guard against price fluctuations that may be brought on by inflation or other adverse circumstances that could affect pricing of the asset.

2)      Options contracts do not last ad infinitum. They have an expiry date that is set to a maximum of three months. When the options expire, they are without value.

3)      There are two varieties of options known as call and put options. A trader can take long and short positions on both varieties of options.

Transaction Costs of Options

As is usual for any type of financial trading, options trading carries transaction costs. Aside from the commissions paid on transactions, there is also a net debit which is accrued on purchasing an option. The net debit is only erased if the option contract is exercised or sold at a profit before expiration.

The situation is different when you sell the options. On selling, you are paid a premium, which you get to keep if the option contract expires. If the contract is exercised, then the profit/loss derived from the act of exercising the contract has to be added to the premium to work out if the trader makes a profit or suffers a net loss at the end of the trade.

But ultimately, the main cost of most concern in trading options are losing trades.  To be successful in trading your revenue, which are your winning trades, needs to be greater in dollar amount than the cost of your losing trades.

Other Expenses in Options Trading Include:

  • Ignorance of how options work.
  • Not knowing and mastering a good options trading strategy and trading system. 
  • Slippage:  not entering when you are supposed to enter.
  • More slippage:  not taking profits when your system or strategy says.
  • Emotional expense that comes with not trading professionally.   Trading professionally means that you find a working plan, a business operations manual if you’re buying a franchise or a trading system if you’re looking to trade. If you trade by your feeling and emotion, unless you have an epically well developed soul, you’ll probably lose and if you start out successful, you’ll probably slip into euphoria overdose later and crash even harder.  To master the markets is to master yourself.  This is why trading can be so good for you as well.  But you must learn and more importantly, you must find a good system and master it with NO Money at first.  Then start trading with a tiny position.  Then mature into a full sized position which is still a fraction of your account. 

End Value of the Options Contract

In option terminology, we speak of a trade contract being in-the-money, at-the-money (breakeven) or out-of-the-money (loss).

A trade is in-the-money when:

–          The current price of the asset is above the strike price (call option).

–          The current price of the asset is below the strike price (put option).

A trade is out-of-the-money when:

–          The current price of the asset is below the strike price (call option).

–          The current price of the asset is above the strike price (put option).

Trading Options

In order to participate in the options market, the trader must open an options trading account with an options broker, and supply his government-issued ID and proof of residence. Option trading is a risky form of investment, and as such a trader must have not just the trading skill but also the financial muscle to take on the option trades. Some options trade types require hefty collateral in the form of margin, and margin requirements for options trading is far above what obtains in forex.

Due to the high-risk nature of this type of investment, it is not suitable for those without an appetite for risk. Option trading requires very intense demo trading practice before a live account can be traded.

That is your standardized answer. Everything has a risk. You can invest in the stock, and it can go down to zero. I had a friend who received $350,000 from a lawsuit. She wanted to be really cautious with that money, so she put it all in general motor stock. It’s a general motor exclamation point; it has to be safe, so she thought. Not so long afterwards, the stock actually went to zero for general motors, and she lost it all.

In order to win in trading, you have to have a plan, as mentioned. But that plant also needs a certain amount of mathematics to succeed. And on top of that, in this realm, the way the matrix works, we don’t get to claim a future event 100% for sure. And actually, by doing so, you probably trigger a quantum matrix scenario where you end up losing regardless of the probability when you get into thinking in terms of sureness and guarantee.

So just like getting in your car and driving to the grocery store, just like going out to a restaurant and taking a bite into their food, just like getting into a relationship, just like going out on a hike in nature, there’s always risk, and something out of the ordinary can happen that can cause you loss, harm, or hurt.

But as one fairly famous football coach once said, “no risk, no biscuit.”.  He was a southerner, and biscuits are a big deal in the South. Anyways, his statement is a very good one in the markets in that, after you get to know price action a bit on a price chart, it’s the scariest emotional trades that tend to do the best. So if you’re trying to feel out a trade, it’s those trades that tend to make the most money. Eventually, you’ll intuitively know what trades will work and what trades will not. But do you understand that your emotions can tend to go in the opposite direction? It just depends on a variety of factors, such as your beliefs when trading goes against other things you need to do, such as not fitting into your lifestyle, or if you’re trading with too much critical money.

Speaking of critical money, yes, you need to have enough money to properly trade a system with the proper position size in order to get your math model series of trades going. And that math model series of trades will depend on you correctly executing your system that you prefigured out or that you studied from someone else who prefigured it out, such as one of our trading systems. But assuming that you have historically studied and practiced the system enough to be able to know when to get in and out of a trade correctly, you want to start with as little money as possible overall. You want to start with just enough to be able to work with your position sizing math versus winning percentage, risk per trade versus potential profit per trade as you found historically, and so on, and then grow from a small amount. Prove yourself with a small amount and grow that to a big amount. Especially with options, you don’t need to put in a large amount of money, and it’s survivable that you don’t.

On the other hand, a lot of people start off with too little money, so one position may take up 50% to even 100% of their trading account. Unless you get lucky, that’s usually not going to work well, and it’s a bad habit to start trading with such large position sizes. So let’s say you get lucky with trading with 50% position sizes. Deep down, later on, you may think it’s okay to do so after you’ve gained a lot of money in your account. Having this deep-down belief that you can get away with doing such a thing with a bigger account will likely send you back to zero really quickly at some point in the future.

Do keep this in mind because sometimes trading logic can go out the window. How so? Unless you are a master of emotions, in the future, a suggestion may come from the marketplace to do a really dumb trade, enticing you with maybe that euphoric type of emotion that you experienced before on a big winning trade. It’s kind of like the illicit drug that euphoric emotion is. Or, you could get impatient because you’ve got a lot of other stressful distracting things in your life, so you try to force things and “make something happen” when they’re not there, and that is way too common as well.

So ultimately, you’re going to have to study a trading system and slowly become good at trading it to the point that you accept it and enjoy it—that you enjoy the process of trading that system. You come to believe in that system and acknowledge that the market is only going to give you what it’s going to give you, and you have no control over that. Additionally, even though that system will miss some moves that you wish you would have been able to catch, you come to realize that making money in the markets is not about trying to catch every move there is but about trading a method that can stably net you a profit over time. Remember that.

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