In this entry we will visit the important criteria to become an active investor, the mindset - a philosophy to investing. This mindset transcends details of what instrument you are trading, what your goals in life are etc. As the title suggests, our favorite instrument are options but in this blog we will understand the mental approach required to begin investing. I’ll share what I’ve learnt from various resources that I have personally invested in. At the very least you can walk away with a summary of these resources. These resources range from expensive training sessions costing several thousands of dollars, nearly a thousand dollars in books and online video tutorials, and what I’d consider the most valuable lesson of all, the tens of thousands that a retail trader loses in risky trades and short-sighted decisions. We’ll walk step by step through the trades (good and bad) and derive ‘thumb rules’ that must guide our trading strategy. As a retail trader the most important measure we can take is to design a set of basic rules and stay within the boundaries of these rules. Yes, options trading is risky and it is not recommended for those who cannot make an effort to understand these rules not just different strategies. With simple yet careful calculations we can make sure that we don’t get into anything that we haven’t planned the worst case for.
If you are paying for favorite “stock picks” or “trade recommendations”, many of which I have purchased in the past, I’d suggest that you get out of them. Such strategies often rely on the probability that a customer pays “a small fee” a.k.a. 100% real money in the hope of entering an elite club that’s somehow informed about what the markets are going to do the next morning. Some of them make a few good recommendations occasionally but that is all there is to such schemes, occasional hits and frequent misses. There is no secret sauce apart from the fact that the game is tipped for the house to win. I want to put honest content out there which is easy for a common man to understand. As far as the complexity of some of the strategies go, it’s synthetic, not organic to the nature of the topic. Plain stocks is a very simple concept: you pay the current market price to buy a stock which lets you own a small piece of the company itself. Options are basically contracts exchanged based on your outlook on a certain stock. Now this seemingly simple concept starts turning into a tricky and fun game-like concept. But what turns it into a complex, all-consuming beast that any long-term options investor/trader will recount is when there is greed. More practically, with [CBOE] and [OIC] video/audio tutorials it is now very easy to understand any strategy. Most of these lectures are delivered by professionals investors and traders who have seen many facets of the industry over the years.
Many people, even the smart ones shy away from the world of options trading. Human tendency is to deny, reject or stay away from something that is not easily understood. In this topic, there are several concepts that seem intimidating and daunting. With the help of past experiences and sometimes references to classic books on options trading such as: Options Volatility and Pricing Options as a Strategic Investment I sincerely believe you will be able to understand the idea behind the particular strategy or trade in question.