Robinhood has been in the news crosshairs over the last few weeks. Its commission-free trading and easy access to options trading has made it the go-to home of new traders. And some pundits are now complaining that these traders are distorting the market.
We believe that's nothing more than sour grapes from Wall Street, who missed the supercharged rally since stocks bottomed in March.
But we also don't want Robinhood traders to miss out on serious gains or take on too much risk, either. In fact, we're here to help you take your trading to the next level.
Maybe you've read about how much money options traders can make but you just didn't know how to do it. Or if you've tried your hand at it, maybe you haven't had much luck yet. The good news is that all you need is a mentor, and that's what we here at Money Morning can do for you.
What you need first is a solid foundation in what options are and how they work. Don't worry, you don't need to learn the same rocket science stuff that the professionals use. You don't have to compete with them, either.
All you really need to do is take small bites out of the market. And do it over and over again.
By now, you are probably familiar with calls and puts and how they work. But there's more to making successful options trades than predicting which direction the stock will move. That's a big part of it, to be sure, but it's easy to get caught chasing gains. Just ask any trader who had a bullish position on when the Dow plunged 7% in one day the week before last.
Options 101: It's never been easier to learn how to trade options, especially with our free guide from top trading expert Tom Gentile. Click here to get it.
What you need are some guiding principles, some rules to keep you disciplined and on the path to profits.
And that's exactly what we've got for you today.
These are the seven rules you can start following right now to instantly improve your trading and protect against the risk of a volatile market.
Check them out...
The 7 Rules to Follow for Successful Options Trading
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1 - Make sure you only trade liquid options. That means options that have some volume behind them. You don't want to buy a call, watch the stock go up, and then be unable to sell that option into an empty marketplace. Remember, any asset is worth zero if nobody else wants to buy it.
To make sure your prospective option is liquid, look at the bid-ask spread. If the spread is just a few pennies apart, then it's likely a liquid trade. If the spread is a wide range, you're likely to overpay and have no one to sell to.
2 - Spread your risk. You should only risk a small percentage of your trading capital on any one trade, no matter how sure you are about it. Don't forget that trading is not a guarantee, and you will lose money from time to time. The idea is not to "blow up" your trading account with huge losses, especially several in a row.
The beauty of options is that they have a lower cost than buying the stock outright, while giving you a much higher chance of growth. But you torpedo this benefit if you pour all of your money into one trade. Keep your costs down and your risk low, and your profits will more than make up for the losses.
3 - Understand how much you can realistically make vs. how much you can lose. It is a simple risk vs. reward exercise. There are many online options calculators to help you, but there are two factors to keep in mind. The longer the option has to expiration, the more "time value" it will have. And the higher the stock trades above the option strike price, the more "intrinsic value" the option will have. Time value plus intrinsic value = traded price (theoretically). Don't forget, a call option at expiration is worth nothing if the stock is at or below the option strike price.
So before buying an option, make sure you're comfortable with how long you have for the stock to move in your direction AND for you to sell it before expiration.
4 - Risk control. If it becomes clear that the trade is not working, cut your losses. Live to trade again another time, and do not ride any trade down to zero.
Investing is different than trading. If you want to invest in a company, you'll ride out the bad times. But a trade is different. If breaking news on the company goes against you, get out while you still can. Chances are the stock won't recover quickly enough.
5 - Leave your emotions at the door. You may love a stock, and that stock may be in a rip-roaring rally, but at some point, the risk/reward ratio is no longer favorable. Do not chase any trade. There will be others.
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6 - Take it easy. If you are successful, keep a cool head and do not overdo it. And if you run into a streak of bad luck, take a breather. Clear your head and look for better opportunities. There is no law that says you have to trade all the time.
7 - Pull the trigger. Don't overanalyze and get started!
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All it takes is a few simple mouse clicks, and you could be hundreds, even thousands, richer.
This is an opportunity you won't want to miss out on.