Lessons Learned by A First-Time Options Trader

Like so many others, I got into the market at the beginning of the pandemic. I thought it would be a great way to pass some time during the quarantine and at the suggestion of my friends, I opened a Robinhood (HOOD) account. And while most get started by investing in stocks, I chose to begin with options trading.

Options are essentially contracts that give a buyer or seller the option to buy or sell 100 shares of a stock at a specific time depending on the type of contract they hold. And what makes options uniquely different from other investments is that they have an expiration date, and the holder of these contracts are not required to buy or sell the asset. In general, this makes options less risky for investors because they require less financial commitment than stocks.

Little did I know that options trading would change my life forever.

Options trading has instilled a lot of discipline and accountability in my life and is now something I look forward to every day.

After downloading Robinhood, I started teaching myself how to trade by watching YouTube tutorial videos like “Option Trading for Beginners” by projectfinance and “How to Read Candlestick Charts” by Online Trading Academy, as well as reading online educational articles. I also read books like “Trading in the Zone'' by Mark Douglas to learn more about the psychology behind options trading.

I also began using stock charts to look up tickers and stock indicators like Relative Strength Indicators (RSIs) and moving averages to select the best stocks in the up-trending market. These particular indicators are helpful because they convey trends in a stock’s performance and disregard a lot of random fluctuations seen in charts. Once I mastered that, I took my studying even further by using Investopedia’s Stock Market Simulator to practice mock trades. This easy-to-use game allows beginner traders to trade all types of securities without risking a single dollar.

After a few months of studying and getting comfortable with the market, I began trading different contracts on a weekly basis with an initial investment of $1,000. I chose Initial Public Offerings (IPOs) and earnings weeks because I saw the biggest changes in a stock’s performance during these times and used these opportunities to capitalize on stocks that I did not know too much about. And since Robinhood only allows for a total of three-day trades per week, I mainly focused on call options with later expiration dates that I thought would bring more profit over the course of a few months.

There are different types of catalysts that can create changes in stock prices. This ranges from profits that reveal the financial health of a business to investors who try to get in early on a stock they think will outperform.

Before getting started though, I would recommend beginners use less than 10% of their portfolio when trading one type of asset. One of my biggest mistakes was using more than 30% to 35% of my portfolio to trade calls. I did this hoping of making sizable returns, but I ended up losing a majority of my initial investment. Diversifying your portfolio is a great way to manage risk and to gain a better understanding of different types of investments that can be made.

So, what are my main takeaways?

First, I've learned that having a general understanding of the market is a must when it comes to being a successful trader. This means constantly learning and educating myself on new strategies and approaches like Bull Call Spreads, which is when you use two call options to make a range between two strike prices, and Covered Call, which is when you hold a long position in a stock while selling a call option of the same size. These strategies are safe and effective ways to lower your risk and improve your returns on calls.

Second, understanding my risk tolerance as a trader was also very important because this determined the types of trades I would inevitably focus on. Since I began trading options, I have transitioned from having an aggressive risk tolerance level to a more moderate and conservative one. Over time, I’ve realized that trading is not race but a marathon and because my goal of trading is to accumulate the highest amount of money possible, I must factor this into my decisions to make smarter and more precise trades. 

Lastly, one of the most important lessons I learned from trading options was learning how to feel comfortable selecting good contracts myself. When I only listened to other’s advice without really doing my own analysis, I inevitably ended up experiencing losses to my portfolio. Mistakes like this were no one else’s fault but my own for not doing the proper due diligence before investing.

There will always be traders who will offer up their thoughts and expectations of a given market, but at the end of the day, it’s up to you to do your own research and make smart investing decisions based on your findings. This, in my opinion, is the key to being a successful trader.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

HOOD

Other Topics

Smart Investing Investing Markets Stocks