PFT#26 - Listener Question: How Do We Trade Options and What Should Beginning Investors Know?
Updated: Mar 5, 2022
Options buying has increased over the last few years with new traders in the game due to the ease of trading and new money from stimulus checks.
So the main question people write about, is what types of options do we trade and what advice do we have for new traders?
The answer is that we play long-term options that expire in one-to-two years.
It is easier to gauge a stock’s long term outlook with a long-term option rather than one that expires a month.
We own call options, anticipating that the stock will rise or hit a certain target before the option expires.
This way if we make some nice profits we can get out at any time and if the options go down in price, we have time to let the option recover without less pressure.
The other thing is that we often play with options with companies where we also own the underlying position in our portfolio.
Hence, we follow these stocks to understand their behavior, their earnings, and forward looking information to make informed decisions.
This is a good way to have confidence in choices and we typically stick to 5-7 companies as we simply don’t have the time or the mental state to track so many companies.
The last point to options trading, is that if you are new to the game and your money should be better spent on debt management or other investing needs, options should just be play money.
In addition, you should never play with money that cannot afford to lose. This is gambling.
We advise, to start small; take your time, don’t get greedy and have a FOMO as that will get you in trouble. Never jump into the deep end of the pool if you don’t know how to swim.
Disclaimer: Make sure that you do your own homework with your investing choices. We provide opinions and statistical information only.