Last night while watching the US markets and doing some blogging, I received an email from Indonesia. He was introduced to me by one of my very close friend.

He started trading in July 07 after attending an options trading seminar while on a vacation in Malaysia. He then started a trading account of $50,000 now down to $13,000. That’s a lot of money to lose for a beginner.

There are plenty of fresh traders being misled into believing in the ability of making millions in a very short period of time just by attending a weekend seminar on options trading.

I am speaking from experience having to blow up my trading account a couple of times; it was a painful lesson indeed. In order to break away from the losing streak, you must unlearn first. Take a look at these scenarios to see whether it makes sense to you for starting over again.

1. Are you already making money in options trading or wanted to become a better trader, but what you are currently doing don’t work and is limiting your progress.

2. Are you taking unnecessary risk, betting instead of trading? If you are feeling the excitements, probably you are gambling, turning the markets into the world’s biggest casino.

3. Are you accepting responsibility for all your losses or blaming it to somebody else. Blame it on to your trainer or the person who gave you the tips? You made all the trading decisions, no one did. So, own up to it! Only then you will be ready to learn and start all over again.

4. Do you get angry when the markets don’t go your way? Do you take it personal and take revenge on the markets? Do you average down your losing positions? Never take revenge on the markets in any circumstances.

Trading options is different and should not be using strategies for stocks trading. Let me show you a very simple illustration between the differences in trading stocks and options for the benefit of the beginners so as not to fall into the trap of using options solely for leveraging and compounding.

Stocks are 2 dimensional – you only make money or lose money in one way. You can make money when you buy and the stock goes up (Long), when you sell and the stock goes down (Short).

You will not make or lose any money if the stock doesn’t move at all, which means that your probability is 50:50.

Options are 4 dimensional – besides relaying on the direction of the stock’s movement, there are 2 unseen forces that will either work for you or against you. It depends on your application, that’s the unfair advantage. Time Decay and Implied Volatility.

Let’s use a Call Option for this illustration.

  1. When the stock price move up – you make money
  2. When the stock move down – you lose money
  3. when the stock move sideways – you lose money due to time decay
  4. After a major event (earnings announcements) - you lose money as the Implied Volatility shrinks and option premium will also shrink.

Your probability is 25:75. Your chance of making money is only 25% but if you understand the mechanics of it and by applying the appropriate strategy, you can turn it around letting time decay and volatility working for you. Your probability will be increase to 75:25.

There are a number of ways of doing it. The common applications are by spreading and hedging. My advice to those who have the intention or have just started using options as a financial tool is paper trade first. If you can’t double up your virtual account, do you think you can do it real money? Be better options traders not gamblers.

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