The Business of Option Trading
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.
Example: If you were a business owner, you would be most interested in cutting your losses, maximizing your profits, and limiting your risks. All of which are 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, option traders will only consider “trade-able” stocks. If it’s not fundamentally sound, or if there’s no clear trend, it is to be avoided.
Getting as Much Profit as Possible
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.
Likewise, if a trader is in a winning trade, he will ride it until the movement runs out of steam. Along the way, he will tighten his stops so he cashes out as soon as the price reverses.
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.
