Trading Options for Long-Term Portfolio Growth

Trading options is often considered to be a risky endeavor by many people. It's easy to see why. Many people jump into trading options after attending a seminar or reading a testimonial about someone who made a lot of money with this strategy. They dream of making fast money and retiring on a beach sipping drinks with umbrellas in them. The perception is that trading options is pretty much like trading stocks except that profits happen much more quickly and are often much greater. Unfortunately, those who do jump into the options market without fully understanding what they are doing often end up losing substantial amounts of money very quickly. Not only do profits happen very quickly with options, but losses can also happen very quickly. In most cases, those who do not fully understand the options market usually end up experiencing those substantial losses.

Where did they go wrong? Those people who jumped into trading options without taking the time to sufficiently learn the subject learned a very important (and costly) lesson....trading options and trading stocks are two completely different animals. Options behave very differently than stocks. Just because a stock experiences an increase in price doesn't necessarily mean that the corresponding option will do the same. There are additional variables that must be factored in including the option's volume and time till expiration. Those people who jumped in before they were ready to trade options and lost a lot of money have giving options trading a bad rap.

The reality is that trading options can be a viable and profitable addition to your investing portfolio. If a person does his homework and patiently tests different strategies with a paper trading account before entering the market with real money, his chances of succeeding are greatly enhanced. Most people who do this would probably conclude that although options are definitely different from stocks, they can still be used in a long-term trading strategy as long as prudence is exercised in their use.

If you are interested in adding options trading to your portfolio, you will want to start by reading through a good book on the subject.  There are a lot of great books to choose from.  One good one to start with is “Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks,” by W. Edward Olmstead.  Yet another great book is “Options Made Easy: Your Guide to Profitable Trading,” by Guy Cohen.

In your quest to enter the options trading market, you might also want to consider purchasing a good option trading software package.  These are computer programs you can download and install on your home computer that let you conduct substantial market research in very little time.  Since options trading requires a lot of market research, you don't want to be without such a powerful tool.  There are many great option trading software packages available for purchase but don't overlook the free ones that are more frequently being offered by the online brokerage firms.  TD Ameritrade, for example, offers a free stock and options analysis software for those who have trading accounts with them.

One thing you definitely want to do before trading options is to practice, practice, practice!  At the expense of sounding like a broken record and reusing tired old cliches, practice really does make perfect.  The great thing about trading stocks or options is that you can practice your strategies in real-time before putting your hard-earned money at risk in real trades.  You can do this with just about any online brokerage account.  It's commonly referred to as “paper trading,” but today this practice trading is done on the internet.  Definitely wait until you're successful with your practice trading before using real money in live trades.  

It's highly likely that trading options would be viewed much differently today if the majority of people had only taken the time to learn the intricacies of this investment vehicle before jumping in.  A little bit of self-education and practice can make a big difference.