{"id":19277,"date":"2017-11-14T10:51:19","date_gmt":"2017-11-14T15:51:19","guid":{"rendered":"http:\/\/www.t3live.com\/blog\/?p=19277"},"modified":"2019-05-17T15:16:59","modified_gmt":"2019-05-17T20:16:59","slug":"your-first-options-trade","status":"publish","type":"post","link":"https:\/\/blog.t3live.com\/2017\/11\/14\/your-first-options-trade\/","title":{"rendered":"7 Things to Know Before Your First Options Trade"},"content":{"rendered":"

Welcome back to our\u00a0Introduction to Options series!<\/p>\n

By now we\u2019ve covered:<\/p>\n

1)\u00a0The ABC\u2019s of Puts and Calls<\/a><\/strong><\/span><\/p>\n

2)\u00a0How Implied Volatility Works<\/a><\/strong><\/span><\/p>\n

3)\u00a0Theta: The Options Trader\u2019s Kryponite<\/a><\/strong><\/span><\/p>\n

4)\u00a03 Simple Options Strategies Beginners Should Know<\/a><\/strong><\/span><\/p>\n

Today, we're going to close out our series with 7 key things you need to know before you place your first options trade.<\/p>\n

These simple tips will help avoid common pitfalls that can destroy your profitability, so we hope you enjoy it!<\/p>\n

1) Start with 1 Contract<\/h3>\n

Yes, you want to swing for the fences and make a big fat pile of cold hard cash with your first options trade.<\/p>\n

But winning traders know that we're not in a spring. We're in a marathon.<\/p>\n

We recommend that you start slowly.<\/p>\n

So if you want to buy call options, just start with 1 contract, and carefully track your trade's progress.<\/p>\n

Likewise, if you're interested in multi-leg strategies like bull\/bear call spreads<\/a><\/strong><\/span> or iron condors, just use one contract for each leg of your trades.<\/p>\n

A big part of your options trading education<\/a><\/strong><\/span> will come from actual trading — so make that education as inexpensive as possible!<\/p>\n

It's very easy to make mistakes with options trading, particularly when it comes to order entry, and it's best to start with small dollar amounts and work your way up.<\/p>\n

2) Be Careful Getting in the Pool Naked<\/strong><\/p>\n

Think twice before putting on naked short options positions.<\/p>\n

A naked short position is one in which you are short call or put options without an offsetting trade that limits your risk.<\/p>\n

The risk is astronomical and if the underlying stock makes a big move against you, your account will be damaged.<\/p>\n

So before putting on trades, consider the risk-reward, and makes sure the odds are in your favor.<\/p>\n

Shorting options can be very lucrative — especially in a volatile market when premiums are high — but you must be very careful.<\/p>\n

We recommend getting the guidance of a more experienced options trader before considering such a trade.<\/p>\n

Shorting options is especially risky ahead of earnings and other events.<\/p>\n

Case in point: take a look at this chart of online retail giant Amazon.com<\/strong> (AMZN).<\/p>\n

As you can see, it gapped up on 10\/27\/2017, the day after it reported a stellar third-quarter earnings report:<\/p>\n

\"\"<\/p>\n

Let's say that when Amazon was trading around $980, you thought there was no way it could get above $1000.<\/p>\n

Ahead of earnings, you could have shorted the December $1,000 calls for around $28.<\/p>\n

So for each call you shorted, you would receive a credit of $2,800.<\/p>\n

Let's look at what happened to this option's price after earnings.<\/p>\n

The December $1,000 call closed at $25.15 on October 26 before the earnings report hit.<\/p>\n

And after Amazon beat expectations and skyrocketed, the option opened at $70.80.<\/p>\n

It then went over $100.<\/p>\n

It's now trading at $131.<\/p>\n

\"\"<\/p>\n

Let's assume you covered at $100 on the dot to keep things simple.<\/p>\n

This means you:<\/p>\n