Are You Prepared to Trade in Options?

If you’re thinking about options trading, you'd be wise to consider the following facts before you take the financial plunge. You can then decide whether to include options in your trading platform.

  • Options are a zero-sum game. This means that for every dollar someone makes, someone loses a dollar. In other words, options, like futures, have both a seller and a buyer. The exception is when you sell a covered call and the stock prices go up, you can exercise the call and no one loses.

    When you make a losing trade, someone else gets an amount equal to your losses transferred to his or her account, and you get charged commission. The exchanges also get a fee.

  • If you win, you will probably owe taxes. The treatment of options in the tax code is complex, and much of it deals with whether you have short-term or long-term gains. The details are provided in the option disclosure statement, which is required reading before you ever trade options.

    You need to read the option disclosure document carefully and discuss the tax-related details with your accountant before trading. The statement is part of the packet of information your broker gives you along with the account application.

  • When you trade options, you’re up against ruthless, skilled, and veteran professionals. Their main goal is to take your money away from you. Some options market opponents are individuals, but others are well-paid and well-informed traders for large corporations that trade options every day as part of their business strategies.

  • You need to know your trading opportunities well. A patient trader waits for the right opportunities. Being overanxious uses up your capital and kills your account over time. Patience works on both sides of the equation. If you find a good trade, then you must be able to wait until it plays itself out before you sell.

  • Forget on-the-job training. Go into your trades with a well-thought-out and well-researched plan.

  • Lose the emotion, but keep the guts. That means you must be able to cut your losses, admit that you were wrong, and wait for the next opportunity.

Can you win at the options-trading game? The answer is yes, as long as you understand the game and develop your trading plan accordingly.

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