Trading options isn’t for everyone.
But hey, neither is bungee jumping!
But let’s say you’re interested in the possibilities trading options can bring to your investments. Sure a 20% or more return per year isn’t an insta-millionaire formula, but it’s a heck of a lot better than what you get with mutual funds or most stocks.
But how do you know if trading options is right for you? I struggled with this very question when I first began investigating options as an investment tool.
By the end of this, you’ll have a clear understanding of whether or not options are right for you. Let’s jump in!
My way or the highway…
Question: Do you like to be in control?
Okay, maybe you don’t have to pull all the levers to make the world turn, but you like to have some control over your piece of the pie. Many of the option traders I know or have talked with love to be in control of their financial destiny.
I talked about this with a friend and mentor of mine. His take on this issue was this:
If just a little bit of education and application of that education can set you slightly ahead of the game, why not do it?
I totally agree. I like to be in control of my finances and understand how each tool I use can help us reach our goals. At the end of the day it’ll be your decisions and execution which makes the difference in your life and sets you on a new trajectory.
So, if you can take a month or even two and learn how to trade options, why not? The worst that could happen is you spend the time learning something, but in the end decide it’s not right for you.
On the flip side, it could open your eyes to the range of possibilities trading options allows and give you the tools to control your future.
IRA = I’m retired already!
Question: Do you already invest in stocks or mutual funds?
A majority of people already invest in some manner in their future. Whether it’s a monthly allotment into savings account or sending money to Mr. Money Manager at some investment firm, chances are you already invest in some form or fashion.
Most folks may think trading options is far from traditional stock or mutual fund investing, but it’s not.
Yes, it does require a little more education on your part. Anyone telling you otherwise would be lying to you. But isn’t it worth it to take a little extra time and earn dramatically higher returns on your investments?
If you already invest in individual stocks or mutual funds, many of the skills you use there are transferable to options trading.
What drove you to pick the stocks or mutual fund you currently invest in? Was it because it’s a company you see every day in the news? Or maybe it’s a company you and all your friends buy from on a regular basis.
The point I’m driving at is you’ll likely be able to trade options with those companies as well. And the best part is you don’t have to empty out your current investments to do so.
You can start with a small account, learn the ropes and then move up from there!
You’re a perpetual student
Q: Do you like to constantly learn new things?
I love learning new things.
You could probably convince me I learn all there is to know about the tax structure of Thailand, and as long as the teacher is motivated I’d be all in!
Options are definitely a perfect subject for the perpetual student.
As a beginner, there are a few strategies (i.e. covered calls) which new traders can cut their teeth on. Once you’ve learned the basics, you can move on to more advanced trading strategies such as spreads and some of the animals like “Iron Condors”.
There’s always something to learn and apply and the best part is, you can get rewarded well for doing it right!
Bet it all on black? I’m in!
Q: Do you mind getting paid to take risk?
I think this is the question which will really separate those who move on to trade versus those who won’t.
Everyone’s risk profile, or how risky you like to be with your money is different. I asked my wife one night if she would risk $50 to make $80 with a 75% probability and she wouldn’t. I was a little surprised since I would make that trade every day if I could, but I think it perfectly highlights how different two people can be.
One of the great things about options is that you can define your risk. Options were created as a risk management tool and there are lots of ways to understand the risk of your position.
Some of the better trading platforms will even provide you a “probability of profit” based on your strategy and the underlying security your option is tied to. This is great for making it clear what your chances are for making a profit on a trade and allowing you to tailor your risk to your preference.
And when you make use of some of these more advanced platforms, such as Think or Swim, you can quickly make your trades and get on with your day.
Let’s do this!
Q: Can you find 30 minutes a month to trade?
I really like to be in charge of our retirement future. Pass or fail, it’s all on me and I like it that way.
However, I don’t want it to eat up all my time. One of the points of trading options is to find an avenue with a higher rate of return than normal which doesn’t eat up my day.
I think it’s definitely possible to trade conservatively with only 30 minutes a month. If you’re looking to eventually try more advanced strategies, it’ll take a little more of your time to do the required work.
Even then, I think it’s possible to get away with just an hour or two a month once you’re passed the initial “learning curve” for options trading.
Personally, I think next to the great returns you can make from options, this is probably one of the best “selling points” for me. Imagine taking only 6-12 hours a year to make a 20% return or better on your investments…awesome!
Bringing it all Together
Everyone needs to decide for themselves whether or not trading options is right for them, that’s really the bottom line here.
However, if you take the time to think through the questions above you can confidently make the decision to continue in your journey to learn how to trade options…I did!
What are your thoughts? What additional questions would or have you asked yourself before embarking on a new investing avenue?
I’d love to hear about it!
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