Trade Options as a Business

For the Serious Trader

Distracted woman at desk
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Options are investment tools that were designed to reduce risk. If you are more interested in using options to speculate, then please don't think about turning speculation into a small home business.

What Makes Trading a Business?

The primary factor that turns trading from a hobby or necessity into something that can be called a business, is your mindset. When deciding to become an active trader, rather than a passive investor, you have taken the first step.

It is not enough to want to own a business in which your job is being an active trader. You must have the ability to overcome some of the psychological factors that hinder a trader:

  • Lack of discipline.
  • Becoming bored with trading.
  • The inability to measure or (especially to) manage risk.​

Think about the typical retail store. They buy some inventory and offer it for sale. When the product sells as expected, they earn their trading profit. Next, they may decide to buy additional inventory, but it is not an automatic decision. They must decide whether the item is seasonal (with sales expected to decline as time passes), merely a short-lived fad (making it too risky to add to their position), or something that is trendy and likely to continue to be a good selling item (increase inventory).

As a trader, you must make similar decisions. Sometimes you add to a winning position. At other times you must recognize that it has become time to get out—no matter how successful or unsuccessful the trade has been.

(That's when retail stores offer discounts (sales) and then larger discounts because they must unload inventory, even at a loss.)

The point is that you cannot (if you want to run a successful business) make decisions without considering as many factors as possible. You must be alert to changing trends (i.e., rising or shrinking implied volatility or bullish/bearish trends).

Discipline

You cannot afford to get lazy and believe that you found the best possible strategy because there will come a time (and it may be as soon as tomorrow) when this specific strategy fails to produce profits.

If you have a significant string of winning trades, do not believe that you are now a star trader, because market conditions will be changing (but we do not know when that will occur). Each new trade requires the same effort and the same decision-making process as your earlier trader (before you became a star).

Most important of all is to pay attention to each position in your portfolio every day. It is not enough to be disciplined when entering into the trade. Every day that you own a position, it is necessary to decide whether it is still a good idea to own it. Is the remaining reward potential worth seeking? Is that reward too small when compared with the potential loss? Do not become a trader who holds onto limited profit spreads when there is so little money left to be earned and so much potential loss (even if incurring that loss is unlikely). 

Boredom vs. Stress

If your trading has been too stressful, take a break. Close positions and take some time off. If you are bored and unfocused, stop trading and take some time off.

If you cannot find any new trades worthy of being part of your portfolio, then do not force new trades. It is not a good idea to take on inventory when your criteria (risk tolerance and comfort zone) are not met. If you accept low-quality trades (similar to the retailer buying items that he hopes, rather than expects his customers to buy), then the risk of losing money is too high. Your goal—especially when operating a business—is to find long-term success. It is not wise to take chances—hoping for a quick profit—that may destroy the business.