Written by A.J. Brown

The Option Trader’s Toolbox

Option Trader's ToolboxTo get started trading stock options, you must have a few tools at your disposal. Without these basic tools, you will not be well equipped to accomplish your task. And what is your task? To multiply your money through the use of options.

In this brief article, I’ll cover the five primary "tools" that must be in every option trader’s toolbox. Once you have these things, you will be ready to hit the ground running… and start making money.

Tool #1: A Brokerage Account

The first thing you will need is a brokerage account. You will deposit money in your brokerage account for trading. When you want to place a trade, you will put in an order and your broker will execute your trade. When you want to exit your trade, you will put in another order, which your broker will then execute.

Without a brokerage account, you will not be able to trade at all. So this is the first tool you will want in your toolbox. Some popular brokerages include: Options Express, TradeStation, Scottrade, eTrade, TD Ameritrade, etc. My personal favorite is Fidelity because of their "bricks and mortar" customer support–meaning I can walk into a Fidelity office and talk with a real person.

Tool #2: Seed Capital

The second "tool" you will need is seed capital. When I say "seed capital," I mean money you have set aside specifically for option trading. This should not be money you are depending on to pay bills. It must be disposable in the sense that it will not affect your monthly finances if you lose some of it.

This is the nature of option trading. Some of your trades will work out well and some won’t. So the money you trade with must be completely separate from the money you use to meet your monthly obligations.

Tool #3: Charting Software & Data Feeds

The third tool that belongs in the option trader’s toolbox is charting software with a data feed. Charting software and data feeds are sometimes available through your broker (as is the case with TradeStation), and sometimes are available as a separate product that you can download and integrate with your broker (as is the case with eSignal and MultiCharts).

If you are a Trading Trainer member, you already have access to charts and a real-time data feed from within the private member area. Simply click on "Trading Tools" and then select "Charting" from the sub-menu.

Tool #4: A Proven Trading Strategy

Obviously, you do not want to start trading options without a plan or strategy for how you will make money. And you must not use just any strategy; you must use one that has been proven to be effective over time.

You might say that option trading strategies are a dime a dozen, but good ones are hard to find. And so I teach the very best strategies I have learned to my Trading Trainer members.

These strategies have been tested and proven effective by my personal experience as well as the experience of my members. And we don’t use one strategy only; we have multiple strategies designed for different market conditions, long-term vs. short-term trades, and more.

While we recognize that simplicity is important, we also recognize that there isn’t one single strategy that fits all market conditions. If there was a strategy like this, what need would there be for trading education?

Tool #5: Accountability

This final tool is one that most traders completely overlook. I overlooked it for years. But when I discovered it, it changed my life. That tool is accountability through a tightly-knit group of like-minded traders.

When I finally joined a group, I discovered there was a lot of power in sharing ideas and "auditing" each other’s trades. It saved me from making many rookie mistakes… and helped us all to make smarter trading decisions.

If you’re not part of an active trading group, I highly recommend you join one. It could be the "secret ingredient" you’ve been looking for. (Note: When you become a Trading Trainer member, you will have the opportunity to join a group.)

These are the five basic tools that should be in every option trader’s toolbox. Are they in yours?

Best regards always,

A.J. Brown

P.S. Of course, there’s one more "tool" I always recommend. That is my Trading Trainer membership community. It provides proven trading strategies, market insights, and trading groups that you can get involved with almost immediately. Learn more about the Trading Trainer community here.

Categories: Education / Options / Resources

9 Responses to “The Option Trader’s Toolbox”

  1. Paul @ 4:57 pm:

    Sounds good A.J. I been buying RIMM Puts when I should of been buying Calls. Making stupid mistakes and losing money which I don’t have much of. How much is your monthly fees to join your Trading Trainer. Would I also be able to make a profit the first month to pay your monthly fees. I’am over fifty years old and only have a small R.S.P. under (10,000) to invest with. But some of the money is tied up in stocks I’am hoping will move soon. How does it work. Do you e-mail the trades to your clients and tell them when to enter and exit. I’am hoping to dump RIMM soon and have a little more capital in my account. It’s an April option contract. I hope it starts taking a dive soon so I can get out. Could you maybe send me a free trade in about two weeks when I unload RIMM. If not send me a reply anyways. Thanks. Paul.

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  2. A.J. Brown @ 11:12 am:

    Hi Paul - Thank you for writing. I will try to answer some of your questions here:

    1. The current monthly cost to be a member of Trading Trainer is $59.95 a month.

    2. Whether you can make a profit the first month or not depends on many factors, especially how much experience you already have… and how quickly you learn my system. Personally, I’d recommend learning as much as you can and then paper trading before risking your hard-earned money.

    3. I do not tell you *what* to trade. I do not give you stock picks. Rather, I teach you *how* to trade. We do have a watch list of stocks that meet our trading criteria, but you still have to know if/when to make a trade. I teach you how to do that.

    4. I can’t send you a “free trade.” I don’t sell stock picks. It’s just not what I do.

    5. I can’t give you any advice regarding your current position with RIMM.

    Thanks again for reading my blog. Hope to see you here often. :-)

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  3. Paul @ 7:24 am:

    A.J. There are free trading sites already that teach you how to trade. I’m already paper trading on a site that will teach me anything I want or need to know. Whether it be beginner,or advance trading, reading charts etc. How about your own personal trades. Do you ever share them with your members and why not? Or do you trade at all, but just make money on the mohthly fees you collect from your customers. I think you should prove yourself first by giving some real trades that pan out first on the profitable side. If your such a good trader and you are actively trading at all why not share your insights, instead of just teaching your customers how to trade with no guarantees. Thanks: Paul

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  4. Personal Finance Money Tips - March 22, 2008 | KCLau's Money Tips @ 6:01 pm (Pingback)

    [...] Brown presents The Option Trader’s Toolbox posted at A.J. Brown’s Options Trading Blog, saying, “To get started trading stock [...]

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  5. A.J. Brown @ 8:29 am:

    Paul,

    If you want to learn how to trade from a “free” site, that’s fine. You can do whatever you think is best for your situation.

    Keep in mind that even “free” information can cost you money.

    As a rule, I don’t share my personal trades. There are many reasons not to share them. Have you ever heard of “stock pick” services? Some of them are actually good. But many are not.

    What’s to keep a newsletter editor from buying a stock, recommending the same stock to drive up the price, then dumping the stock and claiming it as a “profitable trade”?

    This happens more often than you might think. It’s called “pump and dump.”

    For this reason, I don’t share my personal trades. And this is also why I prefer to publish the results of my Members instead of my own.

    I have included some Case Studies in the letter that talks about the Trading Trainer community. They are available for you to review any time.

    Just click on the “Private Training” link at the top of this page.

    Hope this helps.

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  6. boozwatt.com @ 1:15 pm (Trackback)

    The Carnival of Smarter Investing #15…

    Welcome to the Fifteenth Edition of The Carnival of Smarter Investing! We’re back with our fifteenth edition of CoSI, so sit back, relax, and enjoy this supersized gathering of featured articles by investors and writers in the areas of business and re…

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  7. Dave @ 8:50 pm:

    Hi A.J. I have a quick question. I have little money that is completely separate from “obligations” as you mention above. My question is about the amount of seed money required to start option trading. With the cost of Investor’s Business Daily, as mentioned in your audio e-book, and the cost of membership in your site, what would you recommend as a minimum amount of seed money to successfully trade options? Thank you in advance.
    Dave

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  8. A.J. Brown @ 12:32 am:

    Hi Dave-

    Let’s work backwards.

    Let’s risk no more than 4% per trade. That allows us 25 losing trades before we wipe ourselves out. (After five losing trades, I would hope that you stop trading to find out where you’re going wrong!)

    At a 4% portfolio risk per trade, and a 20% stop loss to allow our options to move without getting stopped out inadvertently, we can invest up to 20% of our portfolio on any one given trade.

    Options on tickers that are on our Trading Trainer watch list are priced from a couple of dollars on up.

    Options are sold in contracts.

    That means your cheapest contract would be around the $200 price range. That means your portfolio needs to be in the $1000 range.

    Realize that $1000 portfolio will limit you from trading all but the least expensive options.

    The sweet spot, where almost any of the options we trade are available to you, is when your portfolio grows to $25K (which also allows you to qualify as a pattern day trader with margin).

    I’ve seen people start with $2K, $1K… even $500. But, it’s usually very very slow going. Those that start with $5K to $10K find it much easier to get going.

    Hope that helps!

    -A.J.

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  9. Eli Leonardis @ 3:35 pm:

    We would have to equal with the government’s creditors, both overseas and domestic, and reconstitute our debt. We would eventually and frankly announce bankruptcy. The dollar mark would lose value as a effect. We will lose our world reserve currency position. The costs of primary trade goods and abroad made productions will increase while our salaries will in effect stay flat or drop-off. It will be the drop of America similar to the decline of the Soviet Union in the late 80s and 90s.

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