How to Start Options Trading Profitably: 8 Powerful Things You Need to Know

We’ve been trading options since the 1990s (I know, right?), and over the years it’s always been fascinating seeing new traders enter the foray into the world of options trading.

With over half a million hours of trading experience, we’ve seen every kind of market, bust, and boom the imagination can conjure. Along the way, and as part of any natural learning curve, we’ve done it all too… from the biggest and most bonehead of trades to mind-blowing profitable ones.

It’s all part of the package when you’ve been at it as long as we have at the Rogue Trader Academy.

Like with anything worthwhile in life, experience matters.

Unfortunately for those at the beginning of their journey, experience takes time. There are, however, shortcuts and several intelligent ways of approaching options trading that can significantly slash the learning curve and (hopefully) reduce the number of painful experiences.

This article will guide those who are interested to start options trading with advice tempered with our decades of experience.

Experience and mindset

Let’s cut to the chase. Trader longevity and success comes down to two overarching things: experience and mindset.

The two normally progress hand in hand. Experience, unfortunately, can’t be bought so there’s no choice but to roll up our sleeves and get at it.

With mindset, while there are some people who just seem to be born to trade, for most of us this is a work in progress, and something that is very important to continually develop over time.

Trading and all its accompanying tangibles is a never-ending learning process. Regardless of how long you’ve been at it, you will never know it all, you will never always be “right”, and you will always continuously learn.

That is of course if you’re open to continuous learning. Those that aren’t, and think at some point that they know it all, typically don’t last too long after that.

We’ve all been guilty of suffering from a rigid mindset at times, it’s natural. The sooner you can get over it, the better. The markets are very direct as distributors of both reward and punishment.

When you start options trading or any trading for that matter, there is no better “teacher” in the world that I’m aware of, and no more rewarding career to pursue either.

Our 8 points for long-term options trading success

With decades of experience and countless traders that we’ve mentored over the years, here are eight points of advice we give to our students at Rogue Trader Academy, in order to get them off on the right path for long-term options trading success.

1. Education:

First things first, it’s preferable to at least have a fundamental understanding of the markets, the assets you’re looking to trade, and the theory and mechanics behind it all.

If you’re starting a course such as our Level 1 - Options Fundamentals Course, this will provide you with all the necessary tools and knowledge you need to know in order to get started.

If you’re going it alone, then obviously you need to have a confident level of understanding before you proceed any further down this list.

It’s worth noting that in the end, education and theory are not the most important factors for determining long-term success.  In the beginning, they’re very important, sure… but ultimately, the items below will be the true deciding factors towards your success.

You can read all the books you want, watch YouTube videos with talking heads reading theory from a teleprompter, and “real life examples” which are nothing more than attaching asset names to numbers.  Effectively it’s all pretend. 

If they were showing their real accounts and dealing with eye-watering market moves that forced them to manage trades, that would be different. You’ll learn little to nothing about real trading from these sources without having a deeper context.

“Everyone has a plan: until they get punched in the face”
- Mike Tyson

While theory is fine, more often than not, and most certainly at some point in the very near future once you begin trading, that “punch in the face” is coming.

It’s just the nature of the markets, and why the points below ultimately trump both education and theory.  

But with anything in life, you have to start somewhere. So start here.

2. Mentorship:

To say that mentorship is critical would be an understatement.  Trading can be a lonely road… full of indecision, impulse, and psychological swings.

The cool, calming influence of someone who’s been there and done that cannot be understated.

A mentor can help keep you from making irrational and emotionally based decisions, give you their sets of rules to trade by, and otherwise inspire confidence during the ups and downs.

While you may not have the mentorship that we had (being put through the training of banks and large, established trading firms and guided side by side by experienced traders), there are really good alternatives.

First, you can look for an experienced trader that you trust who offers some form of access to their know-how.  There are plenty of variations on this theme, from monthly calls to real-time trading alerts.

The key is access. While having visibility to their trades (and hopefully they’re not just cherry-picking the good ones) in real-time is great, the real learning takes place by understanding the “why”.  

Why did they take that trade? Why that price? What’s the plan for managing the trade?  These are all very important questions.

If you can’t physically sit beside someone and pick their brain when required, then having some level of regular accessibility to them is certainly the next best thing.

For example, at Rogue Trader Academy, we operate an interactive live trading channel with full transparency to our trades that allows anyone to observe and ask questions. 

Good trades, bad trades, you’ll see it all… and most importantly the management of those trades and our decision-making process.

At a minimum, if you’re unable to interact and ask questions directly, the next best thing would be to follow a mentor's trades (again, hopefully, they’re being honest).  Over time you may be able to pick up on their patterns.

I’m often asked about newsletters and advisory services.  I’m generally rather cool on these, not that there aren’t some good ones out there. The reason is that most of these services present “trade ideas” and speak in generalities.

If they don’t have any “skin in the game” the propensity for honesty is diminished.

When you start options trading, having a mentor or support group is a huge plus.

3. Rules-based systems:

Not having a set of rules to guide you, or not sticking to them is probably the single biggest downfall of failed traders, and certainly new traders.  

If I’ve seen it once, I’ve seen it a thousand times where a trader starts with a set of rules, then promptly begins breaking them, usually when things are going very well, or going very poorly (ironically the most critical time to adhere to their rules), or they start off with no rules at all.

Rules should guide the size of your trades, the entries, exits, and everything in between. The pinnacle of trading achievement is where you can be robotic with everything you do.

An undisciplined and non-rules-based approach to trading will quickly result in the markets making you pay for it… where it hurts the most, on your P&L.

4. Strategy selection:

This is particularly important for new traders in order to reach their initial goals when they start options trading. 

When a trader starts options trading, the strategies need to be simple and risk defined. This will change and evolve as a traders skills and confidence evolve.

The big downfall for new traders, in my experience, is buying OTM (Out of The Money), short-dated options. 

They do this because it’s simple,  they’re cheap to buy, and have the “lottery ticket” appeal.

We all know that buying lottery tickets is a sucker's game. Yet, new traders pile on and continue to do so until their accounts are ground down to the point where they pack it in and move on to other things. 

If we think about it, buying options naked (bought by itself) is the worst possible strategy for new traders because when doing so, one must be precise and correct in both timing and direction. 

Why would a newbie think for a moment that they're somehow going to step into the markets and do this consistently? They’re not.

Consider that sophisticated and veteran traders spend years developing this strategy.  

Unless one is highly adept at analysis and the use of indicators as part of a proven system, we discourage new traders from this strategy.

It’s estimated that 70-90% of new traders fail. This is one of the primary reasons why.

It’s worth noting that we very rarely buy options naked.

Instead, we train our students to begin trading with limited risk, non-directional strategies.

This serves a few purposes:

• Develops a deeper understanding of the options market and the mechanics of options
• Keeps risk limited so that one, or a few successive bad trades, won’t blow the account out
• Generates a more steady and consistent income

Once these strategies become second nature, we can then move the traders that are interested, onto other strategies such as directional ones.

5. Manage risk:

Managing risk is everything in trading, period.  Not managing risk is a surefire and a fast track to failure.

Even a very mediocre trader can have a measure of success if the risk is appropriately managed. 

Taking that a step further, I know plenty of traders who are “right” maybe 4 or 5 times out of 10 on average, yet they’re still very successful.  

You might say “Wait, they’re correct only 4 or 5 times out of 10? How can that be!?”. 
It’s a blend of appropriate trading size, giving winning trades more opportunity for higher returns, and a very strict risk management protocol.

“The only way to increase your wealth is to manage your risk.” -  Rogue Traders

If the risk is not strictly managed, it’s merely a matter of time before you’ll learn a very, and potentially unrecoverable, lesson from the markets.

To start options trading the right way, risk management must be a top priority, and never deviate from.

6. Start options trading with a demo account:

When starting out, everything is new. Perhaps you’ve just learned about options, and you’re more than likely to be using an unfamiliar trading platform.  

Give yourself a break and some time to play around…..test out pressing buttons, executing trades, practicing sticking to your rules, exiting trades, and watching price movements and measurement tools like the Greeks (for options trading).

I get it. I get the excitement that trading brings. Trust me, after decades of doing this, I still LOVE the anticipation and start of the trading day.  There’s absolutely nothing I’d rather do. 

But know this, the markets aren’t going anywhere and opportunities abound….always.

Don’t be too eager to jump straight in, the options market isn’t going anywhere. Instead, get comfortable, perhaps if you’re part of a trading group or follow other traders, observe or copy-trade them for a while in your demo account.

Trust me, even just a few days of getting comfortable with everything will make things much smoother when starting to trade live.

 7. Start small: 

When going live for the first time, and for some time thereafter, it’s imperative that the size of the trades remain small.  This is the progression from using a demo account to going live.

Much like the previous points, don’t be too eager to start risking hard-earned money. The markets and opportunities aren’t going anywhere.

Keeping the size small allows new traders to make the inevitable errors. Heck, I still do from time to time after all these years! Hitting the wrong key, buying when I mean to sell… we’re only human and it happens. 

Trading in small size takes the sting off of these errors or makes them practically inconsequential.

Plus, if you do make an error, or heaven forbid, break your rules and get punished for it, your account won’t be severely damaged or wiped out.

8. Mindset:

Last but most certainly not least is mindset.  Developing and maintaining a proper mindset is never-ending and is a primary determinant of both longevity and success as you begin options trading.

Without it, decisions start to be made on emotions. Whether tiredness, anger, or frustration with other aspects of life, all these things creep into our thoughts and actions.

The two most dangerous emotions are fear and euphoria.  We’ve all been there, and that’s often when trading rules go out the window.

Regarding fear, no one likes to be wrong, but it’s going to happen, that’s trading.

Accept and get used to it. Have your rules and risk management in place.

Remember, our goal as traders is to become unemotional machines.

I’d say that despite feeling better at the time, euphoria is the more dangerous of the two emotional states.  I say this because I’ve seen the damage caused by it. 

When one is euphoric, this invites an invincibility syndrome, risk starts to increase, and corners on rules begin to be cut. A disaster waiting to happen.

There is a myriad of aspects to mindset and its ongoing development but suffice it to say that it’s a lifelong process. 

Whether trading options or trading in general, it can be an incredibly rewarding career or part-time occupation on many levels, not just financially. 

However, minding the points I’ve outlined here, treating trading like a business with a straightforward, disciplined approach will not only smooth out the bumps, but better position anyone for long-term success.