Although there are really no set rules in getting started in options trading, here are a few "pointers" that may help you become a better trader.
To trade options you must first familiarize yourself with basic call and put strategies. Basically you buy call options when you think a stock is going up. You buy puts if you believe the stock is going down. On our website you can find more "in-depth" details on what buying an option involves:
http://www.optionsmentoring.com/stockoptions/stock-option-basics.shtml#39 .
The importance I want to stress is as a "beginner" you may know how options work, and what might look like a "good investment", could end up being a lousy trade. You won't know it's a lousy trade until you start losing money.
For instance, let's take a look at the options currently trading on WalMart ($46.09). The January 50 calls (WMTAJ) are currently bidding 10 cents. The bid and ask price is common with all options, "bid" is what you will pay to buy the call. If you were to buy 10 contracts (100 X .10 X 10) it would cost you a $100. This may not seem like a lot of money but why make a trade if it has little to no chance to succeed?
At first glance, I took a look at the trading range over the past year of the stock. WalMart has traded between $43 and $50 all year long. Of course, when the stock was at $43 in mid-July and made a run to $52 in late October, that was a 10% move, but it took longer than 30 days. The July 50 calls expire on January 19th, 2007. Now, from current levels, if WalMart moved up 10% by then, the stock would be around $51, making this trade a HUGE winner.
Sure this is certainly possible, but WalMart would have to report some good things over the holiday season. As the world's largest retailer, WalMart is capable of pulling off anything but if the company is going to "surprise" Wall Street, it certainly didn't start out on the right foot when they reported that sales at stores open at least a year slipped 0.1% in November. The stock has been in a downtrend since.
This isn't the type of news that would make me feel good about a trade. It is clear that by some reports shoppers are favoring Target and Best Buy more.
The point I want to hammer home is that option trading can be very lucrative once you incorporate knowledge, discipline, and imagination. If you made 10 of these types of trades a year, not only is your track record going to suffer, so is your portfolio.
The more experience you have, the easier it becomes to recognize that the risk on cheap options are not worth the return in some cases.
