Often times you will hear me say that making money with options is an art form. I believe that there are several factors involved becoming successful using options in the financial market.
First, a fundamental understanding of how options work must be developed.
Basically, figuring out how stocks and stock options differ, along with how the role of time decay, option strike selection, the movement of the underlying stock and volatility affect the price of an option.
This may appear to be confusing, because of all the layers involved…
…it's really not that difficult, if you just dedicate some time to learn.
However, building this type of foundation is just the first stage.
In addition, you've got to be able to generate trading ideas. Not only that, but translate these ideas into viable option strategies.
Creating opportunities is not as hard as you might think, for example, selling a put option when implied volatility is relatively high, with option prices are elevated-is a viable strategy.
I even put together a training on exactly how to capitalize on exactly these type of opportunities in How To Sell Put Options For Max Profits In Shorter Time.
Some equity options offer poor liquidity…trading them is generally a bad idea because of all the slippage involve. In addition, volatility tends to get elevated ahead of an upcoming news announcement like an earnings report or some other binary event.
Not only do you have to understand how options work…but you've got to be aware of how options trade under different market conditions. The former could be learned from reading a book…however, the latter, is really only gained from experience.
Then there's the whole money management (risk) aspect and position sizing element involved.
For example, you can have a good idea, however, if you buy or sell too many options relative to your account size…this will give you little margin for error and force you out of the trade without giving it much of a chance to be successful.
What's the best way to learn?
First, I create articles every week and provide free videos to help you. We also have paid courses that attempt to make understanding options simpler- and teach you how to use options the smart way- that will help you get on the right path to long term success.
However, without going out and trading real money….you'll never gain the valuable experience needed to take yourself from raw rookie to consistently profitable options trader/investor.
Of course, you're not going to get it right off the bat. In fact….
…your goal in the beginning should not be to make money…but simply not losing a lot of money.
That means you'll need a decent sized bankroll to absorb any potential losses-while going through some growing pains.
Like the Nike slogan says "Just Do It" … you've just got to get out there and trade (small)… make sure to take notes on your performance.
For example, you'd want to record why you got into the position, amount of risk taken, trade details (option strike, expiration, option premium, options bought/sold, implied volatility, price of the underlying stock, historical volatility, option greeks, how competitive the bid/ask spread is, date position was opened and any updated adjustments that were made along the way.
The idea is to realize the difference between what you think works from what actually works. Of course, this will take some time, hard work and effort. Whilst, having other sources of income is important during this stage…
…which brings me to a question that I received on twitter last week:
Interestingly, this question was asked to about five other traders/investors on twitter. What I found so interesting…. is that all of them responded with different answers such as myself.
The reality is that you've got to put yourself in a position to be successful. That means you'll need to give yourself margin for error. After all, not every trade is going to be a winner…you might have several losses in a row…or one big loss that sets you back for a while.
By trading small, you don't allow one trade to damage your account. If you believe you have a strategy that provides an edge…you let the numbers workout themselves.
It's important to keep your eyes on your trading process…making money is the end result of having a successful approach.
Always put your process first….whilst making money secondary.
I know…It sounds easier said than done. The average option trader will be too stubborn to trade small. They'll want to make the big money right away….lose discipline and eventually blow out their account.
To do this thing right, you've got to trade small and learn from your lessons. Unfortunately, most individuals don't have that type of patience.
With that said, it's extremely difficult to grow an account with $1,000. There's not enough room for error…and that's even if you've got a strong knowledge base under your belt.
In addition, you can't rely on your trading account for income during this learning stage. If income is something you need …it's probably best you do something outside of trading to earn it…especially, if you don't have a proven track record yet.
Capital is the key ingredient to success in any business.
One option can be saving up money from your 9-5 job. If that is out of the question, you might want to pick up a side job, possibly some freelance work, an evening or weekend job.
I believe you need to learn a skill that can create value. This is one of the reasons why I dropped out of college to start pursuing a career in the financial industry at 19 years old. I also believed that experience would help set me apart.
If you don't have that skill yet or a way to create extra capital to deposit into the market…I'd personally take that $1,000 and build a business online…specifically, selling a popular private labeled product on Amazon.
I discussed this before in a previous piece, How Much Money Do You Need To Get Started Trading Options?
In that article, I shared my story on how I took a $1,000 investment, which grossed over $70,000 in sales in it's first year. Now, it's on pace to beat last year's sales numbers by 100% and exceed over $150,000 in sales.
I love the markets and trading, but when I look at opportunities vs risk, this is one of the best opportunities out there right now.
I even spent the last year creating a step by step course teaching a select few- the process of going from beginner to building a successful business on the Amazon platform.
You see, in addition to trading, I run two online businesses. This is important for me psychologically, knowing that when my trading experiences drawdowns, I've got other sources of income coming in.
This is how successful investors build wealth.
They simply don't rely on the stock market…they may have stakes in businesses, real estate etc.
Having a skill set outside of trading that can help generate income is a must in my view. You may not believe it, but with a $1,000 you can conservatively start a business like the one I outline in my Amazon Course.
Not only that, but it brings balance into your life… I know for me, it helps with getting in the right mind frame when I'm trading.
The mind set that option investing is a business…with the goal of making money.
Having a skill set and a side business, will take a tremendous amount of pressure off you when you're going through that learning curve of trading options.
You want to eliminate the fear of having to constantly make money from the markets- in order to put food on your plate.
Sometimes, markets will be slow, sometimes you'll experience drawdowns.
You don't want to always be at the mercy of the markets…having a skill set that generates additional income will help you in so many aspects of your life…as well as your trading.
So my suggestion is to stick with trading a small account and learn from your mistakes.
However, the goal is to gain experience…building a bankroll with $1,000 is going to require a tremendous amount of luck.
I believe you'd be better off in the long-term taking that $1,000 and do something else with it…like what I propose in my Amazon Course.
In the course, I teach you how to build a business and generate income through Amazon.com. This year, that business will generate well over six figures in sales using the same techniques taught in that course.
And you know what? My first year doing it, I started with $1000 and turned it into nearly $70,000 in sales and I believe you can do the same.
Find me a trade that can yield those kind of returns?
Right now, PayPal has a Bill Me Later option that provides you 6 months of financing for the course with zero fee's during that time period.
That allows you to leverage your $1,000 so you can invest that into your product, which is the most important aspect to this business model.
Now, if money is not an issue and you've already got a secondary source of income… I'd suggest you look at trading high probability setups first… like the ones I teach in my SPX Course.
Bottom line…you can't rely on your trading account to bring in money alone in the early stages. You've got to have something else that generates income for you.
This is how successful investors diversify and grow their wealth.
If you're interested in finding out more about "my side business" that generates a healthy six figures in sales- send me a message in the comments section below. I'll send you a private email explaining all the details on how to get started.
It's great that you've started to invest with options, even on a small scale. The money that you've lost is an important and valuable lesson. Hopefully, when you're trading with a larger account in the future, you won't repeat the mistakes you made early on.