5 Genius Ways to Minimize Risk As An Options Trader
- shaggadm
- Sep 11, 2020
- 3 min read
(Without minimizing returns either)
Follow the Money & Trade Options with Our SmartOptions® Artificial Intelligence. Join Here.
Introduction
Being an options trader is one of the most financially risky jobs out there.
Your whole job is to take risk and get a sweet reward.
Options trading is not that easy.
In fact, Barrons.com reports over 90% of Options Traders are failures.
Yikes!
Let's avoid being in that 90%, shall we?
Here are 5 ways you can minimize risk as an Options Trader
1. Proper Capital Management
You might have heard of people making millions trading options. I'm here to say, its possible but only for a select few people.
Most people will lose.
Why? Bad capital management.
A new trader will go heavy into a trade he or she thinks has a super high chance of success.
Little do they know, putting your capital into one trade is a surefire way to losing your whole balance.
Profitable professional traders have a budget they use per trade and stick to it.
Our Advice
Let's say you have $10,000 to trade options with.
How much should you put per trade?
It is recommended you use only 5%-7% of your capital per trade idea.
This way you have multiple chances of hitting a great ROI trade to make up for any losses.
Losers wont impact you as much either and you will have less emotions per trade!
2. Add to Winning Positions Only
We've all been in losing trades. You enter a trade, immediately you lose, what do you do?
You might think to yourself "Let me add to my position and average my buy in."
You buy more contracts at a cheaper prices, then BAM!
Prices crash even more, leaving you in the dust with an even bigger losing position.
Why does this happen?
This is because when you were losing in the first place, it signified that you chose the wrong direction in the first place!
What you should do
You entered a trade and now its in profits, congrats!
What should you do?
You now have a good chance of being right, what you can now do is add to your position!
Yes that's right, your buy in price will go up but you're adding to a winning direction!
Never add to losers.
3. Use The Right Size Stop Loss
I'm sure by now you've heard of stop losses, they cut your loss from a trade.
I'm going to take an unusual view on this topic.
From my 3 years experience trading options, I believe stop losses are actually causing you to exit your trades before they mature into profits!
It's much better to use a loose stop loss and take a bigger hit in options trading.
This helps you from exiting a future profitable trade early by getting stopped out.
Loose stop losses also saves you from the day to day volatility of the options contract.
While it might hurt getting stopped out with a loose stop loss, you'll find that you get stopped way less in your trades!
Minimize your risk of getting stopped out early with a loose stop loss.
4. Buy Longer Dated Options but Not Too Far Out
Another way to minimize risk as an options trader is to buy a further out expiring options contract.
This is super critical for long term options trade success.
No one can predict short term movements with 100% confidence, by buying further out, you give yourself more time to be right.
Time is your friend when you trade options, but it can also be your enemy if you play with short expiring options!
Our Advice
Do not play weeklies! No matter how high the daily ROI you see on weeklies, they are not for successful traders like you and me.
We recommend having at least 30 days from expiry in your options contracts! This gives you a good amount of time for a move to happen in the stock.
5. Buy Valuable Trade Data
Information is the most valuable commodity in todays modern world.
With the right information you can make millions of dollars or even billions.
That's especially true in the stock market and options trading.
You are probably trading right now based on free charts and price data.
That's fine for a beginner but for a more extensive trader, you can go one step further.
You can buy options trade data!
You can buy additional data like unusual options volumes, dark pool trades (trades that aren't public) and more!
Companies like us at SmartOptions® AI lets you receive valuable real time options trade data you can use in your trading arsenal.
If someone puts in $10M in an option expiring in 14 days, our company notifies you of that!
Comments