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Rookie Option Traders

You’d qualify as a Rookie Options Trader in our book if you’re a beginner. You’ve placed just a handful of options trades over the course of your career, if any at all. You may not feel confident that you know how to research option ideas or trades. Rookies may have heard about implied volatility, but you may not really understand it (or perhaps you don’t realize how important, in fact crucial, it is). You’re probably aware that news can affect trade outcomes, but you may not feel proficient at turning the news into potentially successful trade opportunities. You may not fully understand how an option trade becomes profitable, or how to respond if you’re experiencing an unrealized gain or loss.

As a Rookie Options Trader, here are the basics you should master:

  • The difference between in-the-money and out-of-the-money options
  • The difference between intrinsic value vs. time value
  • Why an option is priced the way it is
  • How implied volatility affects option pricing
  • The difference between historical and implied volatility
  • How option pricing is affected when the underlying security moves up or down in price
  • How and why option prices lose value as expiration approaches
  • How and why to exit an option trade prior to expiration
  • What assignment is and why it cannot be prevented once it occurs

Rookie Option Traders can improve their skills by:

  • Reading and studying Options: The Basics
  • Visiting the Rookie’s Corner at OptionsPlaybook.com
  • Reviewing option strategies geared to the Rookie skill level
  • Learning how to use TradeKing’s Options Pricing Calculator
  • Learning how to use TradeKing’s Probability Calculator
  • When ready and after you understand the risks, selling 30-day covered calls since the downside risk is similar to owning stock
  • When ready and after you understand the risks, buying deep in-the-money calls sparingly if using long options as a substitute for owning stock
  • Checking the news regularly for your underlying symbol before making option trades and while option positions are open
  • Staying on the sidelines within one week of any important news event, such as an earnings announcement from the company
  • Finding potential option trades with TradeKing’s Options Scanner from iVolatility.com
  • Anticipating and planning for all possible outcomes for your investments, not just the positive scenarios
  • Engaging members of the Trader Network to help you work through trading ideas
  • Inquiring members of the Trader Network to explain their trading analysis
  • Journaling your trades with Trade Notes to record your trading thought process
  • Attending or watching TradeKing’s free educational webinars, geared to the Rookie skill level
  • Learn how to avoid common option trading mistakes that fellow rookie traders make

Rookie Option Traders should steer clear of the following:

  • Do not buy out-of-the-money options, especially in high quantities
  • Resist the urge to buy low-priced options because they “seem cheap”
  • Do not hold positions in options within one week of the underlying company’s earnings announcement, or other planned news event
  • Resist the temptation to hold positions through expiration week
  • Do not trade strategies labeled for more advanced traders
  • Do not short naked options – this could expose you to unlimited risk
Option strategies entail risk and are not appropriate for everyone. Before trading options, you should review Characteristics and Risks of Standardized Options . Some option strategies involve multiple positions simultaneously. These multi-leg strategies incur additional commissions and may invoke special treatment when preparing your taxes. If you are unsure about how a particular strategy may impact your financial picture, please consult a tax professional before trading.

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