Becoming a full-time options trader can be an exciting and lucrative way to make your living. Full-time traders can make reasonably good money and enjoy the freedom that comes from not being tied to a 9-5 job.
At the same time, you shouldnâ€™t make the jump to full-time trading without careful consideration of the risks and rigorous preparation.
Here are some of the basic steps you should take to get yourself ready if you know you want to trade options for a living.
Learn Options Trading Strategies
If you want to trade on a full-time basis, youâ€™ll need to be able to deploy a wide array of different strategies so that you can execute profitable trades in any market conditions.
While knowing the basics of puts and calls will form the foundation of your options trading, you shouldnâ€™t try to make a living from options until you have mastered more advanced strategies as well.
After all, a tumbling market may require more knowledge and skill than basic strategies will provide for but you should still be proficient in basic options methods.
Generate Cash Flow From Covered Calls
Among the most important strategies to know is the covered call.
In this strategy, a trader sells a call option (usually out of the money) on a stock he or she already owns. By selling the call, the trader can then collect income in the form of a premium from the option.
This strategy allows you to generate cash flow from a stock you believe has long-term potential but which will likely not increase drastically in price in the short run.
Protect Your Downside Using Married Puts
Another useful strategy to know is the married put, in which a long position on a security is paired with a put option that limits downside in the event that the assetâ€™s price drops.
This strategy will allow you to profit from an increase in a securityâ€™s price while simultaneously protecting you from substantial losses at a reasonable cost.
Itâ€™s ideal for a trader who is holding shares of stock but worried about an upcoming event, such as earnings, that may derail a bullish stock chart trend.
Use Collar Trades To Limit Risk
In some cases, you may need to trade in a highly volatile market. When this is the case, a collar trade can help to protect you from unreasonable risks.
Collar trades involve combining a covered call with a long put position in order to offer protection against losses.
Collar trades are fairly advanced, but they can be a useful risk management tool for full-time traders who have to operate in all market conditions.
While these are some of the most prominent and useful options trading strategies, they are far from the only ones you can use to trade successfully.
Advanced Options Trading Strategies
Other strategies you should familiarize yourself with include:
Keep in mind that there are a huge number of strategies out there, so you should always keep learning and testing new ones if you want to maximize your skills and versatility as an options trader.
As you dive deeper youâ€™ll find creative strategies like ratio put backspreads and call backspreads that take advantage of various types of price movements.
For example, you may believe a stock could fall a lot but is unlikely to rise by a great deal over time. No matter what your market outlook an options strategy can be built to fit the bill.
Learn How To Analyze The Stock Market
In addition to knowing many different trading strategies, you should also dedicate some time to learning the tools and techniques of technical analysis.
Popular indicators for options trading include the relative strength index (RSI), the money flow index (MFI) and Bollinger bands.
Using technical analysis, you can increase your chances of finding the right entry and exit points and reliably profiting from your options trades.
Top brokers likeÂ TD Ameritradeâ€™s thinkorswimÂ have hundreds of technical analysis indicators available to you at no extra cost, and even provide insights intoÂ level 2 quotesÂ so you can better anticipate stock market trends.
Set and Follow Strict Trading Rules
One of the biggest and most costly mistakes that newer traders make is to let their emotions influence their trading activities.
To overcome this problem, you need to set and follow a clear set of rules for your trades. These rules should be tailored to your own risk tolerance and clearly define how much you can gain or lose in a certain period of time.
Your trading rules should also include the conditions under which you will enter a trade, again taking into account your risk tolerance and strategy.
Once you have established the rules by which you will trade, you can use tools such as stop loss and take profit orders to automatically enforce them.
Hone Your Skills With Virtual Trading
The best way to learn to trade options profitably is to open positions, try out different strategies and discover what works best through direct experience.
Unfortunately, the time you spend learning through trial and error can be quite costly if youâ€™re putting real money into your trades.
If you want the experience of real-world trading without the financial risk, itâ€™s a good idea to try virtual trading, sometimes also referred to as paper trading.
In a paper trade, youâ€™ll open a position with virtual money.
While the trade will gain or lose hypothetical value according to the movement of the underlying security in the real world, it will not actually involve any real capital.
By trading on paper until you build a track record of success, you can develop considerable trading skills without losing money.
You can also use virtual trading to experiment with new trading strategies and test their success rates without financial risk.
Not sure where to begin?
Trading Options For Dummies is might be a good place to start to help you get up to speed on the basics of options trading.
Once youâ€™ve got the nuts and bolts of options theory and virtual trading behind you, itâ€™s time to place some real world trades.
But which options broker should you choose?
Open an Account With a Good Broker
If you plan to trade options for a living, itâ€™s very important that you open an account with a good options broker.
Ideally, you should find a broker with low commissions, as this will make it easier for you to trade frequently without incurring high costs.
Your broker must also be able to execute trades quickly and accurately. Finally, a good options broker should offer you a variety of analysis tools that will help you more easily determine the risks and rewards of trades and allow you to select the best positions for your risk tolerance level.
Among the top options brokers still is thinkorswim. It combines cutting-edge tools with world class customer support. The order execution, features, and pricing are so competitive that it continues to rank as a 5-star broker in our analysis.