What will I do now since I have lost my job due to covid-19? How can I make more money to give better education to my children? How about I find some easy way to generate extra income to fund a luxury cruise trip? Should I try my hands at Options trading as a side hustle? Everyone is making money by stock trading. Why not I try part-time Options trading for steady income?
If this is what you are thinking, I suggest you hold your horses and think again with a calm mind. If you are falling for the options trading for passive income trick, I would suggest you read this article completely. Save yourself from a big loss!
Life cycle of a newbie Trader
A new trader who starts Options trading as a side hustle goes through the following stages.
Stage 1 (FOMO) – open account & follow the experts in a trading forum
The first stage in the life cycle of a newbie Trader is clearly elucidated by the image shown on the left. It easily depicts the trading account graph of a newbie Trader who starts Trading on the advice of a friend. He would generally start in times when the market looks gung-ho. He starts with the aim of trying Options trading for passive income.
He is ready to follow experts in a trading forum and make trades based on “trading tips” from a forum. For “expert suggestions”, he would also call up one of his friends who recently tried hands on Trading and generated enormous profits.
He would open up an Options trading account recommended by someone close to him or an expert in the trading forum, unknown of the fact that the recommendation is based on level of affiliate commissions, not on level of trading account knowledge.
He starts by cautiously making some good trades by following advice or tips from an experienced Trader.
Stage 2 (Greed) – Denial of lack of expert-level trading knowledge
In second stage of the life cycle, the newborn trader starts making more and more money. However, he starts building up a misconception of expert-level knowledge based on his trading record. Due to this, emotions of pride and greed start surfacing. His faith in doing Options trading for steady income starts getting stronger.
The newbie trader in this stage starts believing that the more trading knowledge he gains, the better he will be at trading. This behaviour is known as Dunning-kruger effect.
Instead of following the Options trading rules of thumb, he starts purchasing trading courses, visits trading seminars and with this newly gained expert-level knowledge, he starts increasing his bet (lot size or number of units/shares traded).
He thinks he has learnt trading well and now the time has come to start making million-dollar bets. This stage is also where the new trader starts experimenting and tries trading self-created strategies.
He also tries dilly-dallying in trading instruments other than those mentioned by experienced traders as good for newbie traders.
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Stage 3 (unacceptance & anger) – blame market manipulation & brokers for losses
That profit streak will obviously not last long because a newbie trader entering the third stage generally cannot beat the big shots out there all by himself. He starts losing more than he’s making on every trade (yellow circle on the peak).
Since he’s not educated himself yet in option trading psychology, the emotions of anger & revenge start creeping up. The original reason of using Options trading to generate a consistent passive income had become a GREED monster instead.
At this third stage of his life cycle, the new trader feels dejected and doesn’t believe that till a few days back he was making so much profit but now is losing on almost all the trades.
For his poor results, he now blames the strategies, seminars, his Options trading broker, market manipulation by the “big sharks”.
However, he doesn’t yet accept his own lack of knowledge and exuberance of emotions of pride and greed. He forgot that he was suppose to follow the options trading thumb rules.
Just because he is facing a losing streak, he thinks that it doesn’t mean he cannot beat the market and make up all the lost money again.
So just like a losing gambler, he doubles up his position size – something strictly not allowed as the per 5th point of position sizing in the Options trading rules of thumb.
Due to this, his account balance starts falling far more rapidly than previously and his account starts going in negative territory (green circle near the break-even line.
If you want to know more about the important elements of Options trading, you can see this Complete Udemy video on introduction to Options trading
Stage 4 (learners & quitters) – end of the show or beginning of a new era
Now the new trader enters the fourth stage of his trading lifecycle. After this newbie trader’s account balance has fallen to zero, two types of trading personalities emerge.
The first type goes into the abdication mode, agrees that it was a bad idea to treat Options trading as a side hustle, and retreats back to a normal job routine or whatever he was doing before venturing in this direction. He is now totally against the feeling that options trading can generate steady passive income.
The second type takes it as a blessing. He accepts that the fourth stage teaches all newbie traders a lesson. He acknowledges what he was doing incorrectly, and accepts that he needs to follow the 12 Options trading rules of thumb strictly.
The second type of trader now knows and adapts to a mind with the right option trading psychology. As a result, he agrees that he needs to learn far more than earlier to consistently & profitably trade options for passive income.
He also pledges to not take Options trading as a hustle but strictly a career – part-time or full time depending on his situation and capacity.
Only the second type of newbie Trader continues to take Options trading as a career.
Stage 5 (phoenix) – born again from the ashes
In the final stage of a newbie trader’s lifecycle, the second type of trader has become more wise now. He arranges some more money from his savings or friends, and starts putting that money again for trading but this time much more cautiously.
He now adheres to the 12 Options trading rules of thumb, uses the same strategies that used to help him make money when he started.
He now carefully follows all principles of option trading psychology, thereby generating consistent passive income from options trading.
However, he now restricts his position size perhaps to even less than the size when he started trading. Due to that, he starts profiting gradually again.
He makes profits and occasional losses but in the end learns from his mistakes and becomes a successful trader.
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Why NOT pursue Options trading as a side hustle?
Honestly, I would advise against thinking of considering options trading as a side hustle. You cannot start putting money in an investment vehicle of which you have no clue.
Making a dollar here and losing a dollar there is not something that will help generate regular income through Options Trading.
What is a side Hustle? Why do you need a side Hustle? You want to make some extra bucks in addition to your primary job income which is why your plan to do some part-time work.
The problem with considering Options trading as just a hobby or a side Hustle is that you don’t take it very seriously. Trading is a very serious business.
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Anyone who promotes Options trading as a “side hustle” has his own intentions behind making you trade options part-time. Either he is selling some book or paid Options trading course or is affiliated with an Options trading broker.
He therefore wants you to open an Options trading account so that he gets commissions from all your trades. He is not really interested in helping you trade Options for extra income.
In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
— Warren Buffett
You have to keep in mind that Options are deadly! They are truly weapons of mass destruction, as rightly said by Warren Buffett. An Option (or any derivative) can be very dangerous in wrong hands or wrong trading personality.
You can see all your money disappear in minutes. See the following video where a guy lost $1500 in year 2011.
The question now is whether you should indulge in options trading for passive income? And if yes, then which is the correct way to trade options to make money, if not the part-time gig of options trading?
I would suggest you treat Options Trading as a career or business – part-time or full time – not hobby or hustle. Do amazon delivery or become Uber driver for a side hustle 🙂
12 Options trading rules of thumb
Read my article on Options fundamentals from the beginning and follow the steps mentioned below.
- Learn Options trading fundamentals.
- Open a demo account.
- Assess your personality on option trading psychology principles
- Start trading basic options strategies (avoid naked options)
- Ensure proper risk management and position sizing.
- Start trading live with little capital and minimum lots, preferably 1 lot.
- Keep a trading journal 1
- Analyze which strategy, market, and time of day is profitable
- Repeat the same strategy for next 3-6 months.
- Increase trading lots if you are really making money with that strategy
- Do NOT search for shortcuts or secret formula or even more strategies 2
- Work on your successful strategies, risk management, emotional control
1 This article is from a popular trading site in Singapore: Trading with rayner. I do NOT endorse it or suggest you take his trading course. I linked it here because I feel the article he wrote is really useful.
2 The goal is to make money from Options trading, not to learn & try hundreds of strategies.
This way you will surely be able to make options trading a career, either part time or full time, instead of a hobby or a gig for part-time income.
If you want to know more about the important elements of Options trading, you can see this Complete Udemy video on introduction to Options trading
Option trading psychology
If you want to make options trading for passive income as a part time career, you need to read about trading psychology in option trading and imbibe these 3 qualities:
Strict discipline
If you read about the the psychology of successful traders, you will notice discipline as the most prominent point. Unless you follow strict discipline, you won’t be able to get consistent income from options trading.
You spent hours or days creating and backtesting a strategy or system. Now the time has come to reap the profits of the seed you sowed.
You should not deviate from the trade you “planned”, no matter how violent the market.
You need to perfect your Option trading psychology in order to really trade Options for extra income.
Before initiating your trade, did you think about the reason for the trade, the possible Target price where you will take profits, and the possible stop loss price where you will exit if your trade is in a loss?
Emotionless mind & poker face
The worst emotions in trading are the emotions of fear and greed. Understand the psychology of successful traders to tune your own Option trading psychology. The greatest achievement is to get rid of fear & greed.
If you are making money, do you feel like doubling your position so that you can make even more?
If the market suddenly reverses and the price of your trading instrument plummets, do you feel like exiting immediately at any cost without even thinking whether exiting now is the right thing to do?
GREED is the biggest enemy of a trader. It is the cause of Leverage, a nuclear weapon in the making. FEAR can still let you live with a little profit.
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Hope is a third emotion, which is a mixture of greed and fear. You hope for things to become fine whenever you are in bad situation.
This is a very powerful and motivational feeling in your personal life that saves you from having an emotional breakdown.
However, It is one of the worst emotions for a trader. You need to master your mind to mirror psychology of professional traders.
If you are losing money do you feel like waiting for some more time so that the price can reverse its course for you to sell at least at break even?
Once you start following what you planned and tested, and already weather an emotionless mind and a poker face while trading, you need to look at two other points that come in way of finding if options trading can be a career for you.
Composure, patience, and solitude
First of all you need to understand that creating and testing a strategy or a trading system can be very tiring, very boring and repetitive.
However, you will begin with a bonding relationship between you and your laptop, not the girl of your dreams.
Once you initiate your trade, you will have to wait patiently for several minutes, hours or even days for the trade to move in your favor.
If you are day trading options, sometimes you will become very lonely sitting in front of your computer for many hours.
A trade won’t be profitable or loss-making as soon as you initiate it or even in a few hours. You will need to really wait, be patient, and not succumb to the annoyance of a stagnant price.
But if you follow whatever has been described in the paragraph above, and work on the options trading rules of thumb, you will indeed find options trading as a career suited for you.
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Conclusion
I hope you enjoyed reading this article. In subsequent articles in this Options Education series, I will explain more on all the above-mentioned points and write more on some advanced topics.
Thank you for reading this article. I have written several other such Investment knowledge related articles in other sections on this website.
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Got a good insight on options trading:)