How do I start?
I have taught a number of people how to invest and trade options. Today someone asked me how I approach teaching something so complicated. Easy - start simple. I began this blog reminding people that you should not start any type of investing until you have an emergency fund fully funded (six months of living expenses). That is simple step number one. Simple step number two is to set up a Roth IRA (in addition to your employer’s sponsored retirement program which I strongly recommend you contribute the maximum to). If you trade in an IRA you can invest and trade tax free. Taxes can eat up a lot of your returns so you need to be tax aware when it comes to investing. The more you can trade within tax free retirement accounts, the better.
Setting up a Roth IRA or any type of investment fund is easy. You can usually do it on-line. If you are new to investing, it is better to go with a large established firm with a full suite of financial products, e.g IRAs, investment accounts, HSA accounts, etc. Larger firms have a large range of educational tools to help you learn about the market and investing. Their tutorials can be very helpful. They also give you access to analyst reports which are essential learning tools. I do have favorite sites but this blog is not about pushing products, so do your own research and pick the platform that makes the most sense to you. Look for firms that have low or no fees for trades - but sites that offer ‘free trades’ are not necessarily the best. You end up paying for trades one way or another. And educational resources are important for beginners.
If you are looking to also trade options as a means to enhance your returns, you need to learn the basics and the best way is by doing. Make sure the platform you chose to trade on allows you to trade options. It should require you to do some critical paperwork and should limit what you can do initially (eg no ‘selling short’). If it does not have these guard rails, I would hesitate to use the site. Being able to trade options without experience and no guard rails can be dangerous, you can lose a lot of money quickly if you do not know what you are doing.
I began trading options after I had accumulated some stocks. The first type of option contracts I wrote were covered calls. I was frustrated to learn that each option contract represented 100 shares of a stock. It was very limiting. I only had a few holdings of 100 shares or more. I decided I would try options using my Pfizer and AT&T shares. These solid dividend paying stocks formed the bulk of my portfolio. I was very conservative when I started investing and wanted well known companies that paid a dividend, so I did not have any of the growth stocks that I now own.
My first option contracts were call contracts. These contracts stated I would sell my AT&T and Pfizer for a strike price that I set 20% above where they were currently trading. I chose an expiration date in the upcoming month. The premiums I was paid for these contacts were just pennies. The money appeared in my account the minute I sold the contract, but it showed in my account as a negative value. It looked like I had lost money. It took me a while to get used to the fact that the account appeared negative because, while I had the cash in my account, the contract was a liability until it was closed. Since options contracts trade just like stocks, the price of the contract fluctuated day to day, hour to hour. Sometime it was positive, sometimes negative.
Options contacts generally expire on the third Thursday of every month. Both of my initial contracts expired on that day with the stock trading well below the strike price. I made a little money. I was thrilled. It was like free money. I was hooked. Investing suddenly became a lot more interesting.
The Market Today: It was up again, closed at new highs. Last week’s 2% correction is forgotten. I, however, am uneasy about the Fed meeting this week and the taper talk that may come out of it, could swing the market a lot. My best trades today were calls for my BABA holdings, I was in and out 4 times and made a tidy sum (mind you, I have a huge loss on BABA I am trying to make up). Was also in and out of MRNA, NVDA puts today. Today was all about trading, not investing, but everything I bought last week to hold is up nicely. Wrote a lot of calls. A total of 28 trades today, a lot for me but making up for last week.