Some folks think of option trading (and stock trading in general) as gambling. The analogy is appropriate in certain cases, especially if a person is unprepared, uneducated, or flat-out reckless.
But it is unfair to make such a broad generalization. Many people treat their option trading very seriously. The best of them treat it like a business.
For example, as a business owner, you would want to limit your risks, maximize your profits, and cut your losses. And the same is true in option trading.
Minimizing Risk
Obviously, a business owner is not going to try to sell a product that nobody wants. That's stupid and risky. He is only going to offer products and services the market wants.
Similarly, if a stock is not "trade-able," an option trader will avoid it. That's because it's extremely risky to trade a stock that has no clear trend or pattern.
Maximizing Profit
Some promotions work better than others. If a business owner finds one that really cranks, he'll run it again and again to milk as much possible profit as he can out of it.
Similarly, an option trader will stay in a winning trade until it stops moving in his favor. He'll set trailing stops to lock-in profits if and when the price moves against him.
Limiting Losses
Every once in a while, a business owner will be saddled with product that won't sell. Instead of keeping it, he'll cut the price to unload it, even if it means taking a loss. That's because it's better to free up the cash for reinvestment elsewhere.
If an option trader finds himself in a bad trade, he'll admit the mistake and cash out as quickly as possible so he can get into a better trade.
Clearly, recklessness is dangerous in both business and trading. But with preparation and the right attitude, option trading can be run just like a business.
But it is unfair to make such a broad generalization. Many people treat their option trading very seriously. The best of them treat it like a business.
For example, as a business owner, you would want to limit your risks, maximize your profits, and cut your losses. And the same is true in option trading.
Minimizing Risk
Obviously, a business owner is not going to try to sell a product that nobody wants. That's stupid and risky. He is only going to offer products and services the market wants.
Similarly, if a stock is not "trade-able," an option trader will avoid it. That's because it's extremely risky to trade a stock that has no clear trend or pattern.
Maximizing Profit
Some promotions work better than others. If a business owner finds one that really cranks, he'll run it again and again to milk as much possible profit as he can out of it.
Similarly, an option trader will stay in a winning trade until it stops moving in his favor. He'll set trailing stops to lock-in profits if and when the price moves against him.
Limiting Losses
Every once in a while, a business owner will be saddled with product that won't sell. Instead of keeping it, he'll cut the price to unload it, even if it means taking a loss. That's because it's better to free up the cash for reinvestment elsewhere.
If an option trader finds himself in a bad trade, he'll admit the mistake and cash out as quickly as possible so he can get into a better trade.
Clearly, recklessness is dangerous in both business and trading. But with preparation and the right attitude, option trading can be run just like a business.
About the Author:
Before you risk another dollar in this volatile market, visit A.J. Brown's option trading blog for free articles and strategies. Better yet, sign up for his option trading learning program to learn the art and business of trading.
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