Six Parts To An Options Contract

All of us students of options trading have heard that the number one reason, the most common element of FAILIRE to make it to the level of professional trading is a lack of proper portfolio management.What’s the problem? Why don’t people get it? Why isn’t it obvious that if you don’t handle your money correctly, you’ll soon have to more money to handle?

Having been a student of options trading now for long enough to have learned some hard lessons, I herein suggest that while there are many reasons and an entire myriad of complex individual stories out there, the basic and largest reason that students of options trading don’t reach their goal is this: Most of these students chase PROFITS instead of PROCESS.

A word of explanation: Of course, we’re all in this to make money. Of course, profits are our ultimate goal.

The challenge is that trading options is not as easy as it might appear or, perhaps, as easy as it is sometimes presented by educational companies. For example, many trading students begin their training career by studying and trading stocks or equities. In this well-known and easily understood process, you buy at one price and, if and when the stock goes up on price, you can sell and make a PROFIT. If the price, after you buy the stock, goes down, you take a loss. (If you learn short trading, the process is the exact opposite and you can make money when the price goes down. But it’s still a one-to-one process — straight-forward and simple.)

But in options trading, the very definition of an options contract tells you that there are several factors, other than the price, to consider.

Here are the six parts to any options contract:

a. A price at which the contract becomes effective, called a strike price
b. A specific time frame, at the end of which the contract becomes null and void
c. A complex connection to what is called volatility or the amount of erratic-ness in the marketplace
d. The current price of the stock or equity upon which this contract is centered
e. The current interests rates in the market
f. The amount of potential dividends.

Because of these factors, you can BUY or SELL and have the price of the stock go UP or DOWN, in any combination, and you can still LOSE money. Just the fact that the clock is ticking as you hold an options position can cause you to lose or gain money. News breaking out in the marketplace can change a trade that’s making money to one that’s now starting to lose money, etc., etc.

I’ve stressed the LOSING of money in these examples because that’s what most students of options do, especially at the beginning of their careers.

So, what’s the KEY to surviving one’s trading curve and LEARNING to trade while not losing so much money that he never makes it to the PROFIT part?

Simple, though not easy: FORGET about profit-making! As a student of options, you must FOCUS on the PROCESS of trading. Have, as your goal, LEARNING how to trade. Profits will come in due time, my friend, in due time.