Watch our video on the importance of paper trading options.
Can You Paper Trade Options?
- Yes you can paper trade options using a trading simulator. Follow these steps.
- Open your account. You will need to fund an account but you DON'T have to use real money to trade with.
- Practice paper trading options before trading with real money to learn the mechanics.
- Treat your paper options account exactly as you would a real account. Set the funding limits to a realistic amount.
- Paper trade options with a realistic size trade. Meaning you wouldn't paper trade options with your full account size in every trade. Never risk more than 1-5% of your account in a trade. When in doubt, follow the 1% rule.
- Decide what options strategies you want to learn. You can day trade options or swing trade options. You can buy options LONG or sell options in things like credit or debit spreads. We give you all the free courses that teach you how.
- Practice these strategies until you can prove that you understand them and can consistently make money in a paper trading account.
- Don't get discouraged. Rome wasn't built in a day. Make sure you pace yourself.
As a rule, when entering the world of options you should first begin by paper trading options. This is not something you should dismiss and brush off as just a suggestion, as the meme above suggests.
The reason you need to paper trade all of these options strategies first...is that they have many moving parts. It's not a stock where you simply buy and it goes up or down and price action is all you need to study. That being said, all these moving parts can affect the profit and loss potential of your trade. If you don't understand something in the world of the stock market...you're likely to have a hard time.
Options can be scary to people because of all the unknown factors involved when you begin. However, all it takes is time and patience and to actually paper trade options before going live. Before you know it, you're trading smoothly and consistently.
There are many different ways to make money with options. Hence the need for paper trading options so you can experiment. As a result, you should start out with the basics. Let's go over the basics of an option first. We'll build up a strong foundation in options trading for you to conquer this challenging field.
1. What Are Options?
An options contract gives you the right but not the obligation to buy 100 shares of a stock if you purchase a long call or if you buy a long put option it gives you the right to put the stock to the person (100 shares) at a certain price within a certain time. Options are time sensitive. Each one is a contract that has a birth date and an end date (death date) In other words, options are wasting assets because they expire on a given date.
So now you know unlike a stock you can't hold an option forever. There is a time limit. If you hold till the last day, and your options expires "in the money" you might be assigned stock for those said 100 shares. However, that isn't a bad thing, if that is your intention. Some people trade options like a game of hot potato. Only holding it while it is moving up in value, with no intention of ever owning the shares. Others actually WANT to be assigned the shares and play the game that way. They like the stock so they buy a call. The call moves up in value and they make money, and get the shares at a huge discount when the option expires worthless.
What does that mean exactly? Let's say you want to buy stock XYZ that's trading at $50 a share. If you were to buy 100 shares of stock XYZ at $50, you'd be paying $5,000.
Let's say you believe that stock XYZ is going to go to $55 by March 31. As a result, you purchase the options contract that lines up with your projection at $2.50.
Multiply $2.50 by 100 and you're paying $250 to control 100 shares. See how much money you save trading options as opposed to stocks? There's more to options however. Hence the need for practicing trading options. Take our options trading course to learn more.
2. So Now You're Ready to Open a Simulated Account
So you understand a little bit the concept of options. Great. Now you need to test the actual buying and selling of them and the different strategies. The best way to do learn options is to trade them. SAFELY!
Time to open a simulated account. ThinkorSwim by TD Ameritrade has a great simulated account to paper trade options. Yes, you have to fund them with some real capital to open their accounts and access real time data and begin paper trading. But its worth it. Don't you dare use that real money yet though! Resist the urge with every single fiber of your body.
You can research the best platforms to trade options within our site. Take a look at our trading companies page to look at all the choices available to you that we have vetted. Make sure you can start paper trading options through them, not every broker lets you do this.
3. Calls and Puts And Paper Trading Them
I like trading basic calls and puts. That means I buy a call when I think a stock is going to rise in price. If I think a stock is going down I buy a put. Also I typically day trade these options. This is usually where most new options traders start out. They don't always stick around with this strategy though. A lot go on to trade iron condors or bear call spreads. These types of strategies are usually used for swing trading and are higher probability trades versus just buying straight calls and puts.
4. Advanced Paper Trading Strategies For Options
Yes, paper trading options allows you to work on the advanced strategies without making costly mistakes. Advanced options strategies allow you to make money whether the market is up, down or moving sideways. Does the Stock Market seem like it's not picking a direction? Is volatility exceptionally low? Well, options are a great way to capitalize on this.
That means you never have to sit out. No matter what the market is doing, there's an options strategy to make money. You must start paper trading options when delving into the advanced strategies, or you're just throwing money away. Don't be careless!
The advanced strategies allow you to manage risk. When your risk is managed, your account is better protected.
5. The Greeks and Paper Trading Options
The ancient Greeks gave the world a lot. Including what we call in the options world "The Greeks". These terms play a huge roll in profit and loss potential. Hence you must begin by paper trading to see how they all work together and study them to have a deeper understanding. As the great Greek philosopher once said "The only true wisdom is in knowing you know nothing." - Socrates.
Truthfully, the Greeks can be overwhelming to new traders. Time decay, IV, intrinsic and extrinsic value are all very unique to options trading and knowing them will help you on paper trading...and that will ultimately help you more when you go live.
It's important that you learn these for yourself instead of following trading services in and out of trades. Mirror trading has it's pro's and cons, but here at the Bullish Bears we are all about giving away the 1% secrets to the 99%. We are main street giving away all the secrets wall street has kept to itself for far too long.
6. Support and Resistance With Paper Trading Options
Support and resistance are extremely important to paper trading options. These are levels that all traders pay close attention to. Paying close attention to trend lines, the opening range. Volume at different support and resistance levels are all key for me when paper trading options
Knowing how to find support and resistance is going to influence what type of options trading strategy you use as well as where you'll take your entries and exits.
In fact, if you take a bullish options trade near resistance and it fails, you're most likely going to take a loss. You need to be able to find those levels.
Everyone is looking for the magic formula to be a successful trader. It's as simple as support and resistance (check out our learn options page).
7. Candlesticks Tell a Story
Candlesticks and patterns are the foundation of trading. Paper trading means you have the be able to spot the patterns.
They also form support and resistance. As you can see, trading has a lot of elements to practice. Candlestick alone tell a story. However, group them together and you get a clearer picture. You might not know what a head and shoulders pattern is today, but once you are able to spot them on a chart, you'l never be able to un-see them.
Remember, since options are wasting assets, picking the correct direction is important.
However, you do want to profit. So it's good to pick the right direction if you're day trading options. If you are trading one of the more advanced strategies, picking a direction isn't as important as understanding the formula.
The Bottom Line
In conclusion, trading options is all about practice. We can't stress to you how important it is. We'd all like to be able to jump in right away and make money. However, that isn't sustainable, and it's just plain ignorant. Most of us do not have money to burn in the beginning stages.
If you paper trade options, you give yourself time to get it right. Working out the kinks is key to mastering a strategy. As a result, when you go live you know what you're doing and you're going to be profitable; which is the dream that every trader has. Don't skip any steps peeps!