THELike so many others, I entered the market at the start of the pandemic. I thought this would be a great way to spend some time in my quarantine and at the suggestion of my friends, I opened a Robinhood (HOOD) account. And although most start with investing in stocks, I chose to start with options trading.
Options are basically contracts that give a buyer or seller the option to buy or sell 100 shares of a stock at a specific time depending on the type of contract they hold. And what differentiates options from other investments is that they have an expiration date and the holder of those contracts is not required to buy or sell the asset. In general, this makes options less risky for investors because they require less financial commitment than stocks.
I had no idea that options trading was going to change my life forever.
Options trading has instilled a lot of discipline and responsibility in my life and now it is something that I look forward to every day.
After downloading Robinhood, I started teaching myself how to trade by watching YouTube video tutorials like “Options trading for beginners” by financing projects and “How to read candlestick charts” by Online Trading Academy, as well as reading educational articles online. I have also read books like “Trading in the Zone” by Mark Douglas to learn more about the psychology behind options trading.
I also started using stock charts to research stock tickers and stock market indicators like relative strength indicators (RSIs) and moving averages to select the best stocks in the market on an uptrend. These particular metrics are useful because they reflect trends in a stock’s performance and ignore many random fluctuations seen in charts. Once I mastered this, I took my studies even further by using Investopedia stock market simulator practice fictitious trades. This easy-to-use game allows novice traders to trade all types of securities without risking a single dollar.
After a few months of studying and familiarizing myself with the market, I started trading different contracts on a weekly basis with an initial investment of $ 1,000. I chose Initial Public Offerings (IPOs) and Earnings Weeks because I saw the biggest changes in a stock’s performance during those time periods and used those opportunities to capitalize on stocks that I didn’t really know. And since Robinhood only allows a total of three days a week trades, I mainly focused on call options with later expiration dates which I thought would bring more profit over the course of a few. month.
There are different types of catalysts that can create changes in stock prices. This ranges from earnings that reveal a company’s financial health to investors trying to jump into a stock they believe will outperform early.
Before we start, I would recommend that newbies use less than 10% of their portfolio when trading any type of asset. One of my biggest mistakes was using over 30% to 35% of my portfolio to trade calls. I did this in the hopes of making significant returns, but ended up losing the majority of my initial investment. Diversifying your portfolio is a great way to manage risk and gain a better understanding of the different types of investments that can be made.
So what are my main takeaways?
First of all, I learned that having a general understanding of the market is essential to be a successful trader. This means constantly learning and educating myself about new strategies and approaches such as Bull Call Spreads, which involves using two call options to establish a range between two strike prices, and Covered Call, which consists of holding a long position. on a stock while selling a call option of the same size. These strategies are safe and effective ways to reduce your risk and improve your call returns.
Second, understanding my tolerance for risk as a trader was also very important as it determined the types of trades I would inevitably focus on. Since starting options trading, I have moved from an aggressive risk tolerance level to a more moderate and conservative level. Over time I have come to realize that trading is not a race but a marathon and because my trading goal is to accumulate as much money as possible, I have to take this into account in my decisions to make smarter and more precise trades.
Finally, one of the most important lessons I learned from options trading was to learn to feel comfortable selecting good contracts on my own. When I only listened to the advice of others without really doing my own analysis, I inevitably ended up suffering losses on my portfolio. Such mistakes weren’t the fault of anyone other than mine, as I did not do due diligence before investing.
There will always be traders who will share their thoughts and expectations in any given market, but at the end of the day, it’s up to you to do your own research and make sound investment decisions based on your findings. This is, in my opinion, the key to being a good trader.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.