You’ve got some extra cash in your pocket, whether it be from a lucky break or you’ve saved up some money throughout the years, and you’ve decided that you want to grow it. You’ve heard about the Stock Market, and how the millionaires and billionaires of the world play in it. You also figured that trading outright Stocks requires a lot of money, so you looked for some alternatives and learned a little bit about Options.
You’re wise enough to realize that managing your money yourself is one of the better ways at growing your personal wealth, when compared to the fees most mutual funds cost.
However, while managing your money can be a great way to grow your personal wealth faster, you should be aware that it can also be a great way to throw away everything you have if you don’t do it wisely. When it comes to Options, there is a right way of doing it and a wrong way of doing it.
Options are a great way to grow your account at a faster pace than passive investing, but if you do it poorly you’re screwed from the get-go.
So what are the steps to not just Options trading, but successful Options trading?
Open A Brokerage Account
The first step would be to open a brokerage account. Here’s a list of the top 3 brokerage firms we recommend, and no we are not affiliated with any of them. We just like them, and think you’ll like them too.
Your broker will allow you to access the marketplace and place trades. They in effect “broker” the deal.
It’s important to weigh the costs and benefits of each brokerage firm. Some brokers charge larger commissions than others, but also provide better features and information. Some brokers are barebones with their features, but offer excellent commission structures.
Also it’s important to recognize what kind of products your broker allows you to trade. For instance, some brokers only allow you to make Stock and Option trades, while others let you trade just Futures. Some brokers, like TD Ameritrade, allow you to place trades in almost every asset class, i.e. Stocks, Futures, Spot Forex, Options, Options on Futures, etc.
While you’re just interested in trading Options at the moment (hence you reading this article), you should also beware of the correlation between asset classes and how you can use them to hedge. I’ll go into detail about what I mean in a later article.
Get A Margin Account
The next step, after finder your broker, is to get a margin account. There’s two basic types of accounts: cash and margin. A cash account is almost like a normal checking account, except you can buy and sell securities.
A margin account (as the name suggests) allows you to place trades on margin, and go short. What is margin? Margin is essentially a performance bond that you put up in order to use leverage on your trades.
For example, if you wanted to buy $100,000 worth of Stock you would have to put up $25,000 in margin (1:4). That margin you put up acts as a cushion should your trade go against you (margin of error). If the trade goes against you by a full $25k, your broker would close you out of the trade before any of their capital started to get eaten up.
In a worst case scenario they would issue you a “margin call” in which you would be asked to put more money into your account to fund the trade further, or close out of it entirely.
Margin and leverage shouldn’t scare you though. They allow you to grow your account at a faster pace than average. Just be cautious when you use it. It’s a two-edged sword. A margin account is completely necessary to have for most Options strategies. In fact, if you use these strategies for your Options trading it should help to limit your risk.
The current regulation to obtain a margin account is to have a $2,000 account balance when applying for the account. After you’re approved, you don’t have to maintain that balance. So you could technically fund the account with $2,000 and leave $500 in, once you’re permissioned, while taking the rest out.
Once you’ve selected your broker and gotten a margin account, you have 2 choices.
You Could Jump Right In
So now that you’ve got yourself a brokerage account with the best broker in the world (I trust you’ve made a good decision) and a margin account, you’re all set to trade most Options strategies. You’re ready to start firing off trades and making the big bucks, right? Not so fast.
You’re not playing a video game here. While you should never trade and risk money that you aren’t prepared to lose, it would be idiotic to just jump right into the deep end. You’re risking your hard-earned money (seriously). There’s no reason to blindly step into the trial by fire that is trading.
Blindly play with fire, and you will get burned.
You Could Get Educated
Now you’re thinking. Why do people go to school? It’s to learn something important and useful from people who have the information that you need. It’s to smooth out the learning curve, and speed up your results. If it makes sense to go to college for a formal education, doesn’t it make sense to get an education when learning about trading Options?
Now, I don’t think I have to tell you that whatever course you choose to learn about Options won’t turn you into a millionaire. Heck, it may not even turn you into a profitable trader. If it’s not going to turn you into a profitable trade, what’s the point of going through a course? Two words: risk mitigation.
Imagine having the decision to walk North, South, East, or West and that walking North was the path towards achieving your goals. When you initially set out on your path, you might be walking South, but you don’t know that because you haven’t asked for any guidance or help. It’s not your fault that you’re on the wrong path. You don’t know any better.
Now you know better. You have no excuse for walking down the wrong path as a lone wolf. Success in any endeavour is not achieved by going at it alone. You need guidance, and you need mentors. At least, if you don’t want to spend a lifetime walking down the wrong path.
You do you. You can go at it alone, with no guidance, or you can get some help. Either way, whatever you choose is your decision, and no one else’s. That’s pretty empowering, isn’t it?
You’re probably thinking to yourself that getting some guidance wouldn’t be a bad idea. Where should you get that guidance? There’s a few ways. One way that we recommend is right here. It’s actually pretty affordable when you compare it to the value it provides you and what other people charge.
Or if you’d like something free (hey, free is something everyone likes), you could give this a shot. Either are good. The choice is yours. Just remember that with any level of greatness you achieve, it will come with sacrifice. Whether that sacrifice will be financial in the form of a paid course, or with market tuition, is up to you.