In a recent conversation with some students who are learning to trade options, they commented that they find it hard to practice in their paper-trading accounts. They felt that they needed real money to be interested. One student made the comment that a boxer develops skills by sparring, but he/she learns by actually fighting.
My response was that they are correct—emotions affect a trader’s ability to trade.
But with regards to paper trading, it is essential that people learning options don’t use real money until they have mastered the material.
I am certain that a student airplane pilot will experience “unique emotions” when his plane is in a tailspin. I am pretty sure that a surgeon will experience some “strong first-time feelings” when his patient’s EKG goes flat line.
That’s why they practice first on simulators and cadavers before the real thing.
In the boxing example, sparring is paper trading. But, new boxers don’t jump into the ring to fight with professionals on their first bout. When you are in the market, you are in there with the pros. The punches are real…and they feel that way, too.
Novice traders can find themselves in some very perilous situations if they are not careful. The covered call is often the first options trade that someone learns. It involves going long (buying) stock and a short (selling) a call. The most you can lose is what you paid for the stock, less the credit received for selling the call (not counting commissions.) If the trader exits the trade in the wrong order – sell the stock before buying back the call – they will find themselves with a naked call. In that situation, the trader has UNLIMITED RISK. That does happen and it can be very hazardous to your portfolio.
I would argue that you don’t need to learn with real money, if you are serious about learning.
If you need emotion or skin-in-the-game to be interested, I would suggest you reflect on what that says about yourself. I am not making any assumptions or judgments. It could mean nothing or a lot of different things. For example: Are you impatient? Are you really committed to learning or do you just want to make money, quickly? Are you a gambler? etc.
Emotion is a very important factor in investing. It can be your worst enemy. That is the reason I hammer on my students for having a trading plan with Primary and Secondary Exits defined BEFORE they enter a trade. That is the best way to control emotions.
In fact, I would be surprised if you could be consistently profitable without going through an entire options education program, like OptionsANIMAL. So, instead of paper trading, you’re ok with that money being considered as tuition, go for it!
But maybe you should consider an investment in options education. It reminds me of a quote from Ben Franklin, “The only thing more expensive than education is ignorance.”