Options trading has, for years, enticed and seduced many people into learning about this relatively unknown form of investing. Stock options are gaining popularity, but the mass population is still not fully aware of their existence. Now that I’ve experienced my own 300% returns on my money, I’ve set out to tell the world about options trading.
The first lesson I will share with you is that when you tell people you’re learning how to trade stock options, their responses will vary. Some will have a vague idea, or think you’re talking about employee stock options. A large majority will tell you that options trading is risky and should be avoided.
Don’t take it personally. They’re just looking out for your best interest.
Many people discouraged me from learning how to trade stock options. I’m glad I didn’t listen because trading stock options has changed my financial future for the better. Learning how to trade stock options was a struggle at first, but over the years I’ve managed to break options trading down into 7 simple steps.
I’m not the original author of the 7 steps, but I have noticed that all successful options traders follow them. Here are the seven steps:
7 Step Process of Trading Stock Options
- Finding Hot Stocks: let’s face it, finding hot stocks that are ready to explode is what every trader is looking for. Combine that explosive price movement with the potential gains of stock options and you have a winning combination.This crucial first step builds the foundation of a successful trading business. You can’t find quality trades on a consistent basis unless you have quality stocks that produce these trades. A free option is to use the Investors Business Daily to find stocks. Feel free to check them out at www.investors.com.
- Creating Your Watch List: your watch list is like your pot of gold. It will overflow with endless trading opportunities. This list is your 50-100 best stocks. Your going to review the stock charts each night, or week, looking for potential option trades.
- Using Technical Analysis to Find Trades: At this point in the trading process you’re going to use technical indicators to evaluate the stocks on your watch list. You’re looking for chart patterns and trade entry signals.
- Creating Your Hot List: If you found a stock that has signaled for a trade entry, you place it on your hot list. This is the list of stocks that you’re ready to commit money to. You pull up the option chain and you pre-select the options you’re going to buy. You then wait until the next trading today.
- Observing the Stocks Follow Through: Did the stock continue in the desired direction? This is considered follow through. After you’ve found a trade, you want the stock to continue in the desired direction. If it does, you enter the trade.
- Planning Your Exit Strategy: why is it that every hotel you stay in has an exit plan? Because they are preparing for the unknown. Trading stock options involves far too many variables beyond your control. You must have an exit strategy planned out before you enter a trade. It’s a way to manage risk. It’s like buying car insurance. You’re protecting yourself in the event of an accident.
- Using Smart Money Management Rules: there’s only one way I know to get rich with options trading and that is to make more money than you lose. In order to do that you have to have a set of rules that will prevent total financial disaster. Don’t forget this crucial last step.