Options trading is a bit complex and can be very profitable if a trader knows what are the risks of his positions. If you’re a beginner options trader, my first piece of advice is to check some basic guidelines before starting an adventure in options trading with your own real hard-earned money. When deciding to reach a blog post on options trading for beginners, I found it useful to list some tips, instead of developing related options content.

As an overall rule, before starting to describe each tip, there are some important things to remember when trading options (for both newbies and experienced traders). Like in stocks or forex, options positions involve risk. In a simplistic way,  is a trader's responsibility to manage his position and total portfolio risk. Unlike stocks or forex, options have other parameters (implied volatility, days until expiration, Delta, to name a few) that impact their value. Therefore, options trading is a bit more complex than simply by and sell a stock or go long or short in forex. Options are a very flexible instrument that allows the trader to adjust in several ways. Usually, I compare options trading to a chess game. There are several ways to adjust a position, as the decision of the next move in chess. And that is why I consider it complex, yet challenging.

I identified 5 key topics on options trading for beginners (but also for experienced). But, let’s move into them that I consider a must for any options trader.

1. Research, study, and practice (a lot!)

Due to the high flexibility and complexity involved, my recommendation is to start learning from available information on the web or buying some books. As stated before, here are my advice on this topic:

Before I suggest any book, I will suggest free education resources available to everyone:

https://www.cboe.com/education/

Here you can learn the basics of options! And available free courses.

There are a lot of books you can learn the basics: here you have some

- Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, by Dan Passarelli

- The Options Playbook: Featuring 40 strategies for Bulls, bears, rookies, all-stars, and everyone  in between, by Brian Overby

And the bible of Volatility based trading (only after you reach a comfortable level and want to move forward):

- Option Volatility and Pricing: Advanced Trading Strategies and Techniques, 2nd Ed, by Sheldon Natenberg

But, my final word is: go to a brokerage company and start trading with paper money using a top options platform with simulation capabilities. I use ThinkorSwim platform. Nothing is better than learning from practice. There you have a simulator where you can see the impact of time, volatility, price change, etc on your position. The practice is key to get the feeling of the expected impacts when several factors change. For any beginner options trader, please start using a demo account. Don't start trading options with real money.

If you decide to move alone, which is good at the beginning to give you the foundations of how options work, my second recommendation is to have at some point in your learning process someone to guide you and highlight details that you will not find in the more theoretical literature. Even after more than 10 years of experience I am studying and learn new topics!

2. Options are highly flexible

Options trading is unlike traditional investing where you simply try to buy low and sell high. Using options, traders can profit by predicting downturns, stagnation, and up moves of the underlying. But, this is not all. You can choose a strategy depending on the Implied Volatility (IV) levels. Or use a strategy based on each option Delta. For experienced options traders, Delta is a key measure to define strikes – more than price percentage from the current level -because Delta varies with IV and it gives an idea of probability.

The flexible nature of trading with options means that a beginner trader who is new to options has a lot more to consider when making a decision. With this trading flexibility come several tactics for either success or failure. For example, a Vertical Spread can be opened at certain strikes. But after some time, if there is profit on it you can close it or turn it into a Butterfly or a Condor to lock-in some profits and gain a bit more. But, even on those strategies, they can be constructed as unbalanced, to produce a certain Delta of the overall position, etc

3. Options are used to adjust positions risk

Options are a great tool to hedge positions. Either stock positions or even options positions. Due to their huge flexibility traders can limit the risks of their position. This is what we do in certain strategies like the Ride Trade. We constantly manage Delta risk using other options trades. Or if a trader has a long stock position but doesn’t want to sell it, buying a Put option for protection to the downside can limit losses if that happens. Several hedging techniques are available in options trading, and they make a compelling case for investors to enter the options world. If you follow my trades or buy any of my strategies you will understand that I am constantly monitoring the risk of the positions (using the Greeks) and adjusting accordingly. Here, I am applying some hedging techniques depending on market conditions.

4. Understand your structure dynamics

Every individual option position or in any multiple options structure has a curve. Understanding the curve and its dynamics (impact of price fluctuation, time passing and implied volatility changes, etc) is key for any trader to know the impacts of variables that will deliver a new outcome to the structure. The trader needs to be in control of the positions. Advanced options trading platforms deliver this info like ThinkorSwim I use. These platforms allow the trader to simulate the passage of time, for example, what would be the impact of a change in volatility, or, simply, the underlying change. This is also relevant to understand how the “Greeks” are affected by those changes. Beginners options traders must understand what would be the impact on changes of those variables in the structure.

5. Always have your exit strategy ready

When it comes to trading options, as with trading stocks, eliminate your emotions. Trading should be understood as a business. Any trader should have a plan to be followed, strictly. This means having a clearly defined exit strategy after any position is entered. Exit strategies aren’t just to execute when the market moves against. They are also guidelines to execute when a profit target is reached. It is also important to know when to leave even when things are going in the trader’s favor.

Options trading for beginners: key takeaways

The bottom line when it comes to profitably trading options is that there is no one-size-fits-all approach. Options are complex instruments that require a lot of study and practice. Understanding options dynamics is very useful to make decisions and this is key to know when to exit a position. Beginners options traders usually fail because they do not understand clearly the impact of each variable. Most of the time they consider underlying price fluctuations and options time decay, which are more obvious. But there are other very important variables to take into consideration like implied volatility levels and Gamma (rate of Delta variation).

Options are trading tools that deliver huge flexibility and can have fast movements. After a position is opened, there are a lot of adjustments possible.  Constant changing Greeks need to be understood in order to develop adjustments to manage position risk (Ride Trade is a good example).

Being an experienced or beginner options trader, always have a plan. This includes an exit strategy at all times (both at a loss and profit).