How to Make Your Fortune in Option Trading

By Brian Lee

If you've made up your mind to turn to option trading to make your fortune, then you'll be advised to be sure and develop your own trading guide to help you in meeting your goal. One of the first issues that your trading guide should cover is the amount of available funds you have for investing.

This is cash that you can reserve for the specific aim of trading options. You must be sure that this capital isn't cash that will cause you fiscal hardship if you turn a loss while trading options. Financial gains from option trading can be substantial if everything is done right. However in the real world everything doesn't go according to plan all the time. Losses in trading options are not only possible but very likely, that’s why the funds used in trading options are called risk capital. A good guideline to follow for beginners is to not use over 10% of your investment capital on any one option trade. This will help keep your risks to a minimum while allowing you to have enough investment capital to realize reasonable gains on your investments.

You should always do your research and choose an investment wisely before you begin. Starting off you'll want to seek out the options which fall within your 10% capital budget. Then you would have to decide if you want to trade the position with a “call or a put”. Obviously there are many different option trading strategies that can be implemented, credit or debit spreads, option writing, etc, but we’ll be sticking to the basics for this article. (If you do want to find out more about option trading, you can checkout my website in the bio box) After deciding if you’re going bullish or bearish on the trade, set a realistic target for how much you would want to profit from this trade. Once you have achieve your target, usually I like to set my target for straight calls and puts at 30%, sell off half of your contracts to minimize your risk. This is called “profit taking’. In layman’s terms after “profit taking” you've made back about 50% of your initial risk, plus leaving the rest of your contracts to “ride” till a technical exit, then you'll have the potential for a greater monetary gain. After all, you certainly cannot make your fortune in stock option trading if you don't make any profits!

After you've begun your investment strategy, you should let it have the chance to prove it to be either profitable or non profitable. A general guideline which works quite well is to set a timeframe based on your trading system for it to work. After this time you should give it a good examination to determine if it's a winner or a loser. By breaking down what went right or wrong you'll be able to decide your next move confidently. It goes without saying that when you do your evaluations, you must keep good records of all transactions, with all the details included.

One of the best reasons to create your own option trading guide is that it's tailored specifically to your own needs. You can make it as flexible or as rigid as you would like for it to be, according to your investment style. If you would like to ensure that you have a plan which does a fairly good job of capital risk reduction, then you will definitely want to go with a flexible plan.

If you would like to gather a few example strategies for option trading, you can find several websites which have strategies and tips to help you along in your quest to make a fortune in option trading. Read what others have to offer then develop a strategy which is your own, and you will be a more confident and wiser investor.

Brian makes his living as a full time trader and coach, if you enjoyed the article, be sure to get your FREE report.
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Published at Feb, 09 '07 , Read 717 times.

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