These 15 tips apply to beginners buying and swing trading call options.
This is not personal financial advice of any kind and is for educational purposes only. You alone are responsible for all actions you take as well as any subsequent gain or loss incurred. Options trading is inherently higher-risk and may not be suitable for all people. Consult your own licensed professional.
1. Take Options Trading Slow
Options aren’t something you have to rush into right now to catch a limited time opportunity. There is absolutely no rush in starting to trade options. You have all the time in the world to research and to educate yourself and feel comfortable. Options aren’t some crypto bubble that’s about to pop. They’ve been around since 1791. They’re not going anywhere. There is no buy-now. So watch a bunch of videos, take it slow, take it easy, and do it whenever you feel ready. Start slow and take it easy.
2. Never Stop Learning
Options are a massive subject and you really can’t know too much about them. So once you’ve got going on trading, keep learning, keep reading books and websites, and keep watching videos, and look at what you can learn from people. There’s so much free info out there and you should drown yourself in it. It’s not gonna be easy to profit on every trade even if you’re good, and it’ll be impossible to if you don’t keep learning.
3. Don’t Start Out By Day Trading
84% of day traders make no profit at all and actually lose money over time. There are a couple of reasons you at least don’t want to “start out“ by day trading. The first reason is if you don’t have $25,000 in an account, you can only make 3 day-trades in any 5 business day period. Not 3 day-trades per week, but per five-day period, so in this rule, Friday comes right before Monday and your last week’s trades count toward this week’s 3 day-trade rule.
If you make FOUR day-trades in a 5-day period, you will lose your ability to day trade for 90 days.
Another reason not to start out with day trading is that day trading typically involves moving large amounts of capital into and out of a stock in a few seconds or a few minutes, hoping to profit on MINUTE changes in the price of that stock. So if your projection is off, and it eventually will be, just by nature or moving so much money into and out of 1 stock, you’re subjecting your account to a lot more risk than you should be.
Now, as you get better and better, and learn more and more, you may want to consider day trading. Just remember that 84% of day traders make no profit and actually lose money in the long run. Personally, I rarely day trade options and will only ever do so if the underlying makes a completely unexpected upward movement that I believe will not hold into tomorrow.
Yes, Day Trading is definitely a subject, so to be clear, my tip is actually that you don’t START OUT by day trading.
As a small account trader, your goal should be to have as much of your account in cash as possible. Think of your cash like an army: You see a battle you want to pick, and you send out a small number of soldiers to pick that fight. If your recon was bad and they lose, you’ll still have 80, 90% of your army intact and will have lived to fight another trade.
4. Keep Your Positions Small
When you buy an options contract, the potential gain is technically unlimited. It’s theoretically infinite. Now, generally speaking, you probably want to take out more than just 1 call, since having only 1 is going to limit your ability to react to changes in the market and make deciding when to sell for maximum profit even more difficult. With a small position of say 2 or 3 calls, I can always sell 1 of them when it’s profitable to do so (securing gains) while leaving 1 or 2 calls open to ride and catch any other potential upside. So you want a position that’s more than 1 call, but not too many that it dramatically multiplies your losses.
Also, stick to a couple of options at a time—and I’m not saying to always trade options on the same stocks which you could do, but that at any one time, have 1, 2, or 3 different options going at most. Start with 1. Get comfortable. Find what works best for you. It’s not going to be 5 or 7 or 10 different options that you’re trading at the same time. Unlike stocks, that you simply buy and hold, options have a ton of variables and things you can learn from each trade. And they’re not as slow to move as stocks are.
5. Trade Cheaper Options to Begin With
This ties in with the last on small positions and trading only a few stocks at a time. Trading cheaper options doesn’t mean buying calls that are way out of the money. It means buying calls on stocks that are currently trading in the 1 or 2 digit ranges but that are still good, solid companies with sound fundamentals. When you’re trading options with a small account, buying a single call option for several hundred dollars just isn’t the best idea, because if the trade goes sour, you’ve eaten up a large percent of your buying power. As a small account trader, I’ve ignored this tip only once because I thought it would pay off well.
Facebook Call Options Swing Trade Example
At the end of July 2020, news came that the President was banning TikTok. At the same time, Facebook was introducing Instagram reels. It was a perfect response to a potential TikTok ban and I thought it was a great buy. I bought and held Facebook calls for 3 days and sold them at a 215% profit. Contrast that with something like FedEx right now, which although it looks perfectly set up for continued upward movement in the short term, I don’t think the news is strong enough to make a $520 call worth it for a small account, because that 1 call would tie up too much capital. Sure, you could set a stop loss, but there are tons of better trades out there for a small account: cheaper stocks that you can take out a couple of contracts on and give yourself some play.
6. Keep Your Confidence in Check
Before you go into a trade, you should do your due diligence, naturally, and you should be confident you’re making the best possible call — no pun intended — on that trade. Confidence is good. But Overconfidence is horrible. And here’s why: Options already have unlimited earnings potential. Those aren’t my words, but are what your broker will tell you. So, sure, having 8-10 contracts of the same call option is going to net you a much bigger return if your analysis and expectations were correct — but, that many calls will also eat into your capital big time if your analysis and projections were wrong. If you can bear that loss, then sure go ahead and increase your position size, but when that confidence really starts to get to your head, and you’re about to lay down 50% of your trading account because you’re just so certain, that’s exactly the time you need to check yourself.
7. Prepare for Wild Fluctuations
Options give you incredible leverage that can potentially help you turn a small amount of money into a much larger amount if you play them correctly. But one thing this also means is that if you’re used to trading stocks that generally trickle upward and downward and give about a 10% return per year, well, options are going to surprise you. Your investment can gain 100, 200, even 1,000 percent in just days. It can also vaporize in days. On the plus side, if all you do is buy call options — which is what these tips apply to—then you can only ever lose 100% of what you put into the trade. In contrast, if you do your trades well, you can get that 200 or even 1,000 percent return, which can cancel out a couple of trades that were a 100% loss. So the point here is to be ready for rapid fluctuations and don’t panic. Before you enter a trade, you honestly have to prepare yourself for dramatic action.
- Some people see losses and [immediately] sell.
- Some people see gains and [immediately] sell.
- Neither is “wrong,” but if you do a bit of both you will only end up: Securing all of your losses and limiting all of your gains.
So, think about this thoroughly and relax. Relax.
8. Avoid Trading Within the First 2 Hours of Market Open
You’ve just bought your first options contract. You feel great and you’re definitely going to be the world’s next millionaire. And then at 6 o’clock the next morning you wake up and check your phone. It’s blood red and you’re doomed and of course, you panic and sell only to see that two hours later things have leveled off and you would have been just fine. So, until you’re familiar with what happens pre-market and at market open and how volatile that can be, hold back from taking any really brash actions in those first few hours.
9. Take Breaks from Trading
Take breaks. Take days off from trading, or even weeks if you need it. You don’t need to be actively trading for every of the 5 trading days to have a good week. Don’t force a trade. Sometimes making the right move means doing nothing. Rather than “looking for stocks” to trade, let them come to you. When you’ve made decent gains or even losses after a streak of trading, take a break and come back fresh.
10. Find a Catalyst (or Several)
When you take out a call option, you’re putting money on the fact that the underlying stock is going to move upward in price sufficiently enough to make your contract valuable. More importantly, in that same move, you’re also saying you’re confident enough that that upward price movement is going to occur while you are still in possession of the contract. So…. What catalyst are you actually banking on that you think will cause the upward movement? If you can’t list at least one or two but at best several such potential catalysts, you shouldn’t really be in that trade. And if you have a catalyst or several of them, ask yourself if those are going to take place or occur within the time frame of your call option. If you’re buying a call with a strike date of a week or two out, try and be sure your price action is going to happen then, and if you’ve anticipated a price increase but aren’t sure about when that action is going to occur, add some date to the trade, by buying a call with a later strike date. Another important point I don’t think we’ve covered yet is that you want to take out calls on volatile stocks. When stocks trade sideways, options get hammered in what’s called theta burn, or time decay. Think of it this way, if a call option secures your right to buy 100 shares at a certain price for a certain time period, then what good is that call option if the price is hovering around flatly right around that strike price? It’s not. If someone wanted those 100 shares, they’d just buy them from the open market and there would be no benefit to having a contract giving them that right since they already have it. It’s like a limited-time coupon for $1 bananas when bananas are already selling for $0.99. Useless.
11. Stack Evidence
Once you have your catalyst in mind, add as much evidence to it as possible. Whether this is market trends, technical analysis, fundamental analysis, trend lines, support, resistance, seasonal events or fluctuation, product releases, or any of the million other factors that affect the stock market and your own trade, stack the evidence in your favor and don’t ignore evidence to the contrary. You’ll need to weigh that into the equation. The bigger the position you plan to take, the more evidence you should stack in your favor. And the more you continue to learn about analysis and trading, the more tools you should be using to consider the evidence that supports or detracts from your projections. Because news is such an overriding part of the evidence in trading, we’ll cover that separately.
12. Don’t Buy or Sell on Impulse
Of course, this seems pretty obvious, but with the amount of fluctuation that options see, it has to be said. The right time to make decisions about a trade is before you enter it. When any of the possible outcomes began to actually take place, whether they’re good or bad, that’s when you should be acting on the plan you already have in place; not making rash decisions influenced by raw emotion. Your plan can include averaging down lightly on a big dip (meaning, buying a few more calls at the now-cheaper price), setting a stop-loss, and of course, selling the position and exiting the trade, or simply riding it out to see if you’re initial projection still comes to fruition. And as a note, this idea of riding it out is another point professional traders will laugh at, so do your own research and set your own plan. For me personally, I’ve had multiple calls dip hard in the red, only to dramatically recover a day or two before expiry, when the price action I had imagined finally occurred. But again, set your own plan whatever it is, and just know the important thing is that you actually have one to replace emotion with logic in your trades.
13. Keep Abreast of the Market
The more due diligence you do, the better you will trade. For small account traders, this might simply mean that instead of spending hours on Facebook or Instagram, you spend them on Robinhood and StockTwits, and Google News. The more capital you’re investing, the more research you should do. And if you want to live long enough to be able to trade large amounts of capital, then you need to do research. So again, replace your time on Instagram and Facebook with time on StockTwits, Robinhood, and Google News or Finance, and in my opinion that should allow enough research to start doing small to medium-sized trades. Similarly, you’ll do better if you start to look at the world differently, and by that I mean you look at as an investor.
Microsoft Call Options Swing Trade Example
For example, in late June and early July when Microsoft announced their next Xbox reveal for August, and that they were permanently closing all of their retail stores (which were a net loss), I saw an opportunity and we made a 218% return in 4 days.
Same with Facebook which I mentioned earlier: In July, a billion Instagram users were seeing messages about a new feature called Reels. Reels is practically a knock-off of TikTok, and TikTok was up for a possible ban in the U.S. But how many people looked at these two related events not as users of the app but as investors in the company? For us, that trade returned 215%. So you have to see the world through different eyes and let trade ideas kind of come to you naturally. If you start looking at the world this way, you’ll probably perfect the art of a simple low-risk swing trade.
This isn’t something you can do 20, 40 minutes a day and succeed at long-term. But also remember that the average person uses their phone for five or more hours a day. And they aren’t making phone calls. So if you can convert your phone time into due diligence, you’ll be more likely to succeed.
14. Follow Your Tickers on StockTwits
Now I know I’m going to take all kinds of flack for saying that, and I don’t really care. I’m saying it to save you money and endless headaches as a beginning investor. If you don’t already know, StockTwits is Twitter for stocks. If you’re thinking about trading calls, you’ve got to be up to date on what’s up with that stock. You’ll see a ton of helpful data and charts from traders who are much more experienced. Now I’m not saying to replicate anyone else’s trades. I am saying that the data is the data and you should keep a finger on it. I follow tickers for a few days before buying most calls, and minimally start following it during my initial research. It’s also really important to know that on any ticker, about half of the tweets you see will be from bullish investors — meaning investors who think the stock is going to go up — and the other half will be from bearish investors — people who think the stock is going to go down. So some of what you see there is fake or exaggerated news and useless comments from people who think it sways the market or that it influences people like you to do something stupid that would benefit them. It’s incredibly stupid, but when you see it you’ll know what I’m talking about. So your job is to ignore everything but the actual data. Data is charts, news, support and resistance, 50- or 90-day moving averages, large buy or sell orders, product release, news, news and news. So you ONLY take the data, you form your own opinion, and you write out your own trading plan.
For example, “Looks like this is going lower.” Is useless and contains no actual data. But “bounced off the…” is data you can add to your analysis. You’ll get a hang of what is data versus opinion and on who to follow. But again, never mimic another trader, just add the data to your own thought process. A great trader might give some good data and says he’s bullish: he thinks the stock is ping up. But what you don’t know if he’s bullish long-term or short-term, and he has absolutely no idea what your position and strike date are. So again take the data only. Something someone else thinks is bad news could be great news for you and vice versa.
15. Set Your Own Risk Tolerance and Stick To It
Your first job as a trader is NOT to make money. Your first job as a trader is to LIMIT YOUR RISK. That is the only way you will be able to continue trading. Even great traders blow up accounts all the time. The tips we’ve already covered are all ways to limit your risk, and there are so many more ways out there, including options strategies that are a lot more complicated. To start, if you can master these tips, I think you’ll find that your risk is reduced enough that you can keep trading even if you occasionally have a loss.
Finally, I want to reiterate tip number 2, which is to keep learning. Don’t ever settle with what you know. Don’t ever get stuck on a single, repeating pattern. Trading takes endless education and new due diligence with every single trade. No two trades are ever the same and the ONLY thing that remains consistent is the fact that a call gives you the right but not the obligation to buy 100 shares of a stock (the underlying asset) at a certain price (the strike price) before a certain day (the strike date).
Everything else is a constant variable.
So keep learning, keep reading, keep watching, keep practicing; keep questioning, and you may be a successful trader.
