Making money is the main reason to start trading options. If you are new to trading options, you may wonder how much you can expect to earn in your first year of trading. Your trading income is an essential part of your financial well-being and motivates you to grow in your trading and keep learning.
The short answer is that there is no standard dollar amount for what you can make in your first year of trading options. Indeed, there are so many factors, such as your risk tolerance, account size, and types of transactions you want to make that can impact your returns.
One thing is sure, earning a full-time income as an options trader isn’t as easy as it might seem.
What Can You Expect to Earn Realistically When Trading Options?
You shouldn’t set your expectations too high when starting to trade options. Wishing to make 500% a year or 25% per month are unrealistic goals. Unrealistic expectations will inevitably lead you to failure and disappointment. A return of 25% per year – rather than per month – is more realistic.
But before focusing on how much money you can make with options, you need to learn how to trade options successfully. Experience is the best teacher. Trading derivatives, such as stock options, is a very technical and complex process.
Be sure to have a trading plan and educate yourself to have the best chance of success in your new venture.
Options Trading Mistakes to Avoid
To be successful in options trading, you need to avoid certain mistakes. Here are three huge mistakes beginners are making.
Buying out-of-the-money (OTM) call options
Buying OTM call options seems like a good place to start for new options traders because they are inexpensive. It fits the pattern you are used to following as a stock trader: buy low and try to sell high. But OTM call options are one of the hardest ways to consistently make money in options trading. If you limit yourself to this strategy alone, you risk losing money more often than making a profit.
Most beginners abuse the leverage offered by option contracts, without realizing the risk they are taking. They are often attracted to buying short-term calls.
You need to understand the leverage effect. Here’s a general rule for beginner options traders: if you usually trade 100 lots of stock, stick with one option to start with. If you normally trade 200 lots of stock, maybe try two contracts. That’s a good amount of testing to start with. If you don’t have success in these sizes, you probably won’t have success with the larger size trades.
Not having an exit plan
When trading options, just like stocks, controlling your emotions is key. To do this, make a plan and stick to it. This includes having an exit plan, even when things go your way. Choose a bullish exit point, a bearish exit point, and your timeframes for each exit well in advance.
Define your exit strategy. Whether you’re buying or selling options, an exit plan can help you establish more effective trading patterns and keep your worries under control.
Define an exit plan on the upside and the worst-case scenario you are willing to tolerate on the downside. If you reach your upside targets, clear your position and take your profits. Don’t be greedy. If you hit your stop-loss on the downside, you need to clear your position again. Do not expose yourself to further risk in the hope that the price of options may come back.
An Investor’s Guide to Trading Options
Here are a few tips to help you in your options trading journey.
Do a first paper trade with a small amount of money: Before doing real trades, you should start by doing everything on paper. This is a great way to learn from your mistakes without losing real money.
Once you feel comfortable with your paper transactions, you should keep them small once you decide to invest real money. Think about it, if you can’t trade profitably with $5,000, how are you going to succeed with $50,000?
Accept that you will have losses: The harsh truth is that only a small number of traders are consistently profitable over a long period of time. If you’re just starting out, expect to incur losses as you navigate the learning curve . For example, you will likely have options that will expire out of the money and lose your premium, or you will need to sell a position to close it at a loss to mitigate the damage of a trade that went against you. However, the most important factor that differentiates you from many other traders is learning from your mistakes and continuing to trade after failing.
Trade regularly: Too many people are giving up options trading after four or five losing trades. It’s a pity because these losses can earn you a lot, especially in the beginning. Losing money is part of the game, but it’s how you handle your losses that makes all the difference.
Writing down each trade is a great habit to have. Analyze each part of the trade. Read the technical indicators and control your emotions.
Develop a trading strategy based on facts: One of the most effective ways to be successful in options trading is to have a solid trading methodology. Choose your favorite market information sources and subscribe to their newsletters and read new insights that challenge your assumptions.
Developing these research methods and forcing you to evaluate your trades will encourage you to view your trades more objectively and to set realistic profit expectations. The first steps will be difficult, but persistence and due diligence will guide you to an effective and manageable trading strategy.
A popular options strategy is scalping stock options. This strategy involves exploiting small price changes and making a quick profit when reselling. As scalping requires frequent buying and selling, it is costly in terms of commissions, which can reduce profits. The broker must not only provide prerequisites, such as direct access to markets, but also competitive commissions. And not all brokers allow scalping.
Hedging techniques in option trading are used by investors to reduce their exposure to risk in the event that an asset in their portfolio is subject to a sudden drop in price. When done correctly, hedging strategies reduce uncertainty and limit losses without significantly reducing the potential rate of return.
Don’t think you will become rich in a year: Do you really think it’s realistic to expect a small amount of money, say $5,000, to be enough to give you a consistent income that could replace your full-time job? Some people may be able to do it, but they’ll be taking an incredible amount of risk. Don’t invest more than you can afford to lose. Instead of viewing your trades as a slot machine, it’s a better idea to focus on low-risk, high-frequency trades. The key to success with options is to keep your trades consistent and to trade them persistently, even when you hit a losing streak.
If you are able to break away from the idea of becoming a multi-millionaire trader overnight and take an objective stance on your strategies, you have better chances to be a winner. The key is to view trading options as a long-term commitment to self-improvement. Be patient and treat your trading like a profession. After all, the goal is to generate income over time.
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