Trading options in the stock market can blow up your entire portfolio.
At one point, I was up about $10,000 and then as soon as I got curious about options, I lost about $2,000. This came from overtrading and trying to hit some home runs while trading options.
When I think of the stock market, opportunity and long-term investing come to mind. I also think about Warren Buffett, Apple, and the Stock Market Crash of 1929. If you see investing as an opportunity, you’re one of the more optimistic people who see the potential to accumulate more money than you started with in the first place.
Trading options is basically a way of taking an increasing the risk you take and also increasing the volatility of your outcome. We will talk about how to trade options later, but here are a few things you should know first.
An Introduction to Trading Options
People have lost thousands of dollars in a span of thirty minutes of trading options. It can seem more like gambling at the casino rather than taking calculated measures before making moves. Many options traders think with their emotions and often make poor financial decisions.
What is a “Call Option”?
A call option is when you think the price of a stock is going up. You can select the price you think it will reach by the end of the expiration date.
The entire option you’re exercising is called a contract.
Each contract comes with a premium price that you pay, and if you’re right you reap the benefits and make considerable amounts of money, or lose it all.
What is a “Put Option”?
A put option is when you think the price of a stock is going down. You can choose your strike price you think it will reach by the end of the expiration date.
Expiration dates further down the line will cost you a higher premium because you have more time for your strike price to hit.
When you sell your put, you collect profit if it fell from the price you purchased the contract at. But if the price rises when you made a “put” you’re going to lose money.
What is “Scalping”?
Scalping is an intense form of day trading where you purchase an option and then quickly take profits assuming you were correct and get out of your position.
I’ve made as much as $400 scalping and lost as much as $380 all in the matter of minutes. It’s too high-stakes and pressure for me, and I don’t recommend you do it unless you get some practice first and learn online.
Options Are Not Guaranteed Money
The saying goes, “stonks always go up”. But in the way that the entire world is right now especially during a Pandemic leaves a lot of uncertainty on the table.
If we all knew when things would finally be normal again and we wouldn’t have to worry about getting sick, then we could live more at peace and work again. Unemployment has driven upwards at a shocking rate, and this definitely affects the stock market.
Don’t try to hit home runs in the stock market, you might just end up getting burned like I did. Know the type of trader you are and you’ll grow your account at a steady rate.
Trading stocks in the market is a lot of fun and exciting when you’re in the green. But when greed takes over and puts you in a position of becoming an emotional trader, there’s a chance you could lose everything you worked for.
Options take away the reassurance of you becoming profitable. If you’re wrong, you lose your money and it goes poof. But if you buy shares and equity and the stock price drops, you’re fine because you still hold those assets.
Understanding your risk tolerance will help you decide whether or not trading options on Wall Street with the high rollers is for you.
Remember, there’s nothing wrong with starting small and building up steadily over time.