How to Get Started Investing in Options

There has been a lot of interest from readers regarding learning about options and getting started in options trading.  But first, I would like to offer the requisite disclaimers.  I am not a professional options trader, but am simply an everyday individual who has been trading and using options for his own accounts since 1999.  Through these 13 years of experience, I would like to think that I have learned a thing or two and would like to share these things with you so that you don’t make some of the same mistakes that I did.

It Starts with Education

Learning about options is much like learning an entirely new language.  It is not that it is any more difficult than learning any other new skill like welding or accounting or Spanish.  It is simply intimidating for many people because of the terminology and the fact that money is involved.

So the first thing that I would recommend is getting a solid foundation by learning about the terminology involved and reading a book or two on the subject.  I counted my books on options trading yesterday and found 11 on my bookshelf solely devoted to the topic.  I have many others on stock investing and real estate as well.

Of those that I have, there are two that I would recommend for beginners:

“Getting Started in Options” by Michael C. Thomsett which is available at Amazon for $13.57 and “Stocks for Options Trading: Low-Risk, Low-Stress Strategies for Selling Stock Options-Profitably” by Harvey Friedentag which is a lot more expensive, but worth it.  This book is from 1999, and I noticed that he has a new book that came out in 2009 which I haven’t read.

You could search for these books and others through my Amazon link at the end of this article.  I am an affiliate so would pick up a small commission.

Of course, there are plenty of free resources on the web to learn about the terminology.  I am working on one such resource over at OptionsDudeAtoZ.  You can also follow some of my trading at OptionsDude.com.  There is also a forum over there where you could post questions.  I would be happy to answer them and get into much greater detail.

Consider Paper Trading

It is always recommended that investors learning something new start with paper trading.  While I have done a little, I must confess that paper trading just didn’t mesh with my personality.  You have to understand that there is a big difference between simulated trading and trading when real money is on the line.  A HUGE difference!  Everything you thought you knew flies out the window once emotions become involved, and I guarantee that they will.

There is nothing wrong with doing a little paper trading initially to make sure you understand what you are doing and the impact that certain market movements will have on your positions.  Just understand that it is different from actual trading.

Start With Level 1

If you want to trade options, you have to be approved by your brokerage.  Brokerages have different levels of approval depending upon your amount of capital and experience.  These levels will range from level 1 up to level 4 or 5 depending upon the brokerage.  At E*Trade for example, level 1 only includes covered calls.  Covered calls are considered the most conservative options trade, but I believe that the safety of covered calls could be a total myth.  Be that as it may, it is still a good place to begin one’s understanding of call options.

For my next post, I would like to begin discussing covered calls and what I would do now following years of experience.  I would like you to avoid many of the mistakes that I made.  I do learn from my mistakes and have found experience to be a good and thorough teacher.