The Best Way to Get into Options Trading: A Beginner’s Guide

Risk aversion is paramount when starting in options trading. As a beginner, it is important to trade gamma long, meaning you are holding premium, not betting against it. Shorting options, especially those that are out-of-the-money, is generally not advisable until you have gained significant experience.

Begin with liquidly traded underlyings, as this will provide a smoother and less volatile trading experience. Avoid short-duration trades that are less than a week, as these can be highly unpredictable and lead to unnecessary risk.

Learning Through Practice

A recommended approach for beginners is to start with buying calls and puts. Spend the first year familiarizing yourself with the intricacies of options trading. This period will help you to understand and control your emotions and get very familiar with the fundamental aspects of options trading before considering more complex strategies.

Disclaimer: This guide is for educational purposes only and does not constitute investment or trading advice.

Starting with Educational Resources

For a solid foundation, start with Chuck Hughes’ downloadable books, which are free and provide a comprehensive base. My personal favorite is the ”calendar spread”. When selecting options, I monitor the trend lines for the specific stock or index, using the 10 and 20 EMA lines to determine the current trend.

For example, if the trend is upward, consider buying a call about 3 or 4 weeks out, and then sell weekly out-of-the-money options against the long-term options. It’s crucial that your weekly options do not move into the money, so set protective stop-loss orders. If the stop loss is triggered, you can always sell a further out-of-the-money option.

Practical Steps to Get Started

Begin with taking tutorials and consider purchasing books, such as the The Essential Options Trading Guide. The best way to start is to get a feel for what it’s like to hold options by buying an at-the-money, six-month simple option, such as a call on the SP 500 futures.

Observe how your emotions change as time goes by and prices fluctuate. This exercise will help you understand the psychological aspects of options trading. The next step might be to buy protection for an existing portfolio. This introduces additional considerations, including the price of the option relative to your portfolio and the mixed emotions of balancing your portfolio’s value with the increasing value of your option.

First, get a feel for the experience. If you jump into trading too frequently and impulsively, you will not be able to make a profit. By understanding your own emotional and psychological responses, you can develop a more stable and profitable trading strategy.

Additional Resources:
- Chuck Hughes’ Downloadable Books
- The Essential Options Trading Guide