Learning to Trade Options: A Beginner's Gamble and a Path to Education
This article documents a beginner's introduction to options trading, starting with a risky gamble and transitioning into a lesson on technical analysis. The goal is to highlight the potential pitfalls of uninformed trading while demonstrating a more structured approach.
The $500 Gamble: A Beginner's Luck?
The initial experiment involved a friend, Jay, with no prior trading experience. He funded a Robinhood account with $500 and was instructed to randomly select an option contract on Tesla. The aim was to simulate the experience of many beginners who dive into options without proper knowledge.
-
Jay chose a May 3rd Tesla call option with limited guidance.
-
Due to slow order fills on Robinhood, the order needed adjustment to get executed.
-
Ultimately, the trade was placed, and the outcome remained to be seen.
Options Trading Basics: Calls, Puts, and Leverage
Before placing the trade, Jay was given a very brief explanation of options.
-
A call option is a bet that the price of a stock will go up, while a put option is a bet that the price will go down.
-
Options are leveraged, meaning a small amount of capital can control a larger position. This offers potential for high gains but also significant risk.
-
In-the-money contracts have intrinsic value, while out-of-the-money contracts rely on the price reaching a certain level by the expiration date.
Technical Analysis: Moving Averages and Support/Resistance
After the risky trade, the focus shifted to education. The core of this education involved an overview of Technical Analysis.
-
The session covered the basics of chart reading and analysis.
-
Charts and Order Flow are critical. The instructor stated "I am doing all of my trading based off of charts and order flow."
-
Candlesticks represent price movements over a specific time frame. The example used a four-hour timeframe.
-
Moving averages (180-day SMA, 50-day SMA, and 15-day EMA) act as reference points for potential support and resistance levels.
-
The 180-day SMA, representing the average movement over a longer period, is considered the strongest indicator.
-
Support is a price level where a stock tends to stop falling, while resistance is a price level where a stock tends to stop rising.
Swing Trading Strategy: Identifying Bullish Trends
The lesson introduced a simple swing trading strategy using moving averages to identify bullish trends.
-
The goal is to find stocks where the 180-day SMA is respected as a support level.
-
A "respected" moving average means the price consistently bounces off of it.
-
The student then went through several stock charts, determining if each had a bullish or bearish pattern.
-
They also determined if the 180-day SMA was being respected as support.
Identifying A Trading Opportunity with AIG
The student identified that AIG had a bullish trend, and that the 180-day SMA was being respected.
-
The instructor and student agreed that AIG presented a possible opportunity to play the bullish trend, betting that it would continue to rise.
-
The instructor stated the student would be wrong if it broke below the 180-day SMA and started selling off.
-
They discussed a trade plan with a target near the all-time high, with a stop-loss order slightly below the 180-day SMA.
Beginner's Luck: A Positive Outcome
With one minute left before the market closed, the team checked in on the initial risky trade.
-
The initial $500 gamble resulted in a $60 profit!
-
The position was quickly sold to lock in the gains.
-
This unexpected win highlighted the potential rewards of options trading, but also the risks of uninformed decisions.
From Gambling to Education: A Path Forward
While the beginner's luck resulted in a profit, the importance of education and a structured approach to trading was emphasized. Further lessons will cover:
-
Defined trading setups with checklists.
-
Custom tools for analysis and risk management.
-
Access to the instructor's trades for shadowing and learning.
The goal is to transition from random gambling to informed trading, equipping aspiring traders with the knowledge and tools to make sound decisions and manage risk effectively.