Kim Klaiman is a full-time Options Trader and founder of steadyoptions.com, an options education and advisory service.
We recently checked in with Kim to get his insight on options trading. here’s what he shared:
What’s your background in options trading? How did you become interested in it?
I started actively investing in stocks and bonds in 2002. Next year was my first full year as an investor and produced 57 percent return for me. We all know that it was the beginning of a new bull market. Back then I still was not aware of an old saying “don’t confuse brains with a bull market”. When the profits pile up during a bull market, it’s easy to think your superb analytical skills are responsible.
I had been trading a lot of options strategies, directional and non-directional. The turning point was in 2009 when I decided to concentrate on studying and mastering a handful of non-directional options strategies.
What’s your philosophy on options trading? How do you strategize your trading?
I became consistently profitable only when I completely abandoned speculative directional strategies and started trading a limited number of non-directional options strategies. Each strategy has been extensively backtested. The key to success in options trading is using a variety of diversified options trading strategies, like straddles, calendars, iron condors, etc. In my opinion, you can rarely succeed in options trading by buying some cheap out-of-the-money options and “hoping” for a big move.
What are the biggest mistakes you’ve made as a trader? What are the most important lessons you’ve learned so far?
Here are some simple rules that helped me over the years:
- Trade options trading as a business.
- Have a full trading plan.
- Set your performance goals in years, not months or weeks.
- Paper trade first. It takes time to get used to new strategies. When you are ready to invest real money, keep it small and increase your allocation gradually.
- Position sizing is the key. With proper position sizing, even few consecutive losers will have little impact on your account.
- Focus on following your trading plan not its short term results.
What are the most common mistakes you see other traders making? How could they have been avoided?
The biggest mistake novice traders make: they give up too quickly. Learning how to trade and invest successfully requires a lifetime of work, dedication and focus. Not only is there a long and difficult learning curve just to learn the basic fundamentals, but you’ll also soon discover that being a student of the markets never ends. To become an engineer you have to study four years, and probably another four years (at least) to become a good one. Why do people expect it to be different in trading?
What are some options trading basics every trader should have a good grasp on?
Before you start trading options, you need to understand some of the most basic facts about options:
- Option is a right to buy or sell the underlying asset.
- There are two types of Options: Calls and Puts. Understanding the difference between the two is absolutely crucial to getting started.
- What is a strike price?
- What is Options Expiration?
- What You Can Do With an Option?
Don’t even start thinking about trading options if you don’t have the basic understanding of those terms.
How can traders get more consistent results?
Traders need to understand that options trading is not easy. It requires effort and time commitment. The learning process never stops. The key to finding AND maintaining a high level of success in the markets is to trade and invest according to your own risk tolerance, time horizon, investment goals and personality. This is very important. Your No. 1 goal should be to develop your own approach that takes all of these things into account.
What’s the climate for options trading right now? How has it changed since you started trading?
I would say that options became more popular. The options trading volume increases from year to year. Unfortunately, options trading is still considered very risky by many traders.
The options, by themselves, are not dangerous tools. The only dangerous part of options trading is the risk-insensitive trader who buys and sells options with little or no understanding of just what can go wrong.
What resources (books, blogs, etc.) helped your understanding of options trading the most? What should we be reading to learn more?
One of my first books was The Rookie’s Guide to Options by Mark D. Wolfinger. This is a real classic that I recommend to all novice traders. You can find a full list of books that I recommend here.
What advice do you find yourself repeating to clients over and over again?
The key to success is to understand your risk. In fact, be obsessed with risk management if you want to survive as a trader for the long term.
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