Don't Fear Options; Start Trading with These Four Steps

Editor's Note: Many investors steer clear of options, thinking them too difficult or risky to trade. That's a common misconception - one Tom's determined to set straight. He first identified these four simple steps to options success in 2015, but they stand the test of time. Here's Tom...

Money Morning reader recently wrote in and summed up what we often hear: "Options scare the heck out of me."

It's common for investors to think options are too risky for them. That's why many never bother to try.

But the options trading strategies I teach you can reduce risk by up to 90% compared to if you bought the underlying stock. And in 2008, when many lost 50% of their savings to the stock market plunge, options could have reduced that loss to 10%.

The markets will do whatever they want. It is not what happens in the markets that will make or break you. It's how you deal with what the markets do after you make your entry decisions that will set you - and your profits - apart from others.

My goal is to have you learn exactly what options can do for you. Understanding the potential reward as well as the risk can help you overcome your fear. I'll show you the proper principles and rules to follow so you know what to do and what not to do.

Let's get started...

Four Steps to Options Success

Options Terms to Know

An option is a contract that gives the owner the right to buy or sell a financial product at a specific price on or before a specific date.

Calls and puts are options that are bought to establish a long position or sold (also known as writing) to establish a short position.

call option gives the owner the right (but not the obligation) to buy the underlying instrument on or before the expiration date. You profit on a call when the underlying instrument increases in price.

put option gives the owner the right (but not the obligation) to sell the underlying instrument on or before the expiration date. You profit on a put when the underlying instrument decreases in price.

Expiration is the last date on which you can exercise your option. For all intents and purposes, expiration occurs at the close of market on the third Friday of the month.

The options trading process involves four basic components. Follow all four - and give equal importance to each - and you'll become comfortable with this strategy and with options.

Here are the four key factors to successful options trading:

  • Find a reward-to-risk trade setup that favors reward
  • Utilize a low(er) risk trading strategy to take advantage of it
  • Have a clear entry and exit plan
  • Stay disciplined

The first part - finding a reward-to-risk trade setup - means finding a stock we believe can make a move. I find this using technical analysis.

Technical analysis involves analyzing different charts to find repeatable price moves and patterns. It does not matter which direction the repeated pattern makes; there are strategies that can make you money if a stock moves up, down, or sideways. The first goal is to find these setups.

The second component is to use a strategy to take advantage of these moves. Options involve a "lower risk" trading strategy because they require less capital than buying a stock, so you're risking less money. As I've outlined in previous articles, long calls, long puts, and the bull-call spread are examples of ways to spend less and earn more.

To establish an entry/exit plan, first you need to know how much you want to risk on each trade as a percentage of your trading or overall portfolio. Then know under what conditions or at what price you will open or take the trade. Then have a clear exit plan both for profit or loss. I outline these when I highlight opportunities to readers in Money Morning, in my Power Profit Trades publication, and in my premium trading services.

And the fourth component to successful options trading?

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Tom Gentile is America's No. 1 Pattern Trader, and for good reason. Since 2009, he's taught over 300,000 traders his option trading secrets, including how to find low-risk, high-reward opportunities. Now he's sharing that insight with you. To get started, just click here - you'll get Tom's twice-weekly Power Profit Trades delivered directly to your inbox, free of charge.

Stay disciplined. This is key to all investing. Consistency - and not getting swayed by emotion - is crucial; you are most successful when you execute each step of a process every time.

Applying these four components will require work and discipline. Within each of those four items are many more steps, things that need to be done to accomplish each of the goals. There's no shame if you think options trading really isn't for you.

But the more familiar you are with the process, the more confident in it you will become. Then it will be easier to stick to these rules. Ultimately, this will result in you becoming more confident as an investor. Once you know you can execute the plan for gain or managed loss, then you will know how to mitigate fear and take action consistently.

Follow along in Money Morning and I will continue to tell you the factors I look for and how the back-tested results of strategies I use help me gain confidence to make the right trades.

The Bottom Line: Trading involves risk; there is no way around it. Money can be both earned and lost in trading. The fear of losing money is valid, but being successful in trading will come down to overcoming that fear. You can do that with a predetermined, practiced, and established trading process. Respect the risk, but know that through familiarity gained through options education, you won't be scared of options anymore.

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About the Author

Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.

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