Paper Trading Options is a Risk Free Way of Buying Stock Options

Module 6: Trading Options
Lesson 6: Paper Trading Options

Paper trading options is a risk free way to hone your skills as an options trader. Learning how to profit on paper will increase your chances of profiting with real money.

This course is designed for beginner traders. Paper trading is the only form of trading I recommend for beginners. Buying stock options can be risky so you should crawl before you walk.

Paper trading options is a bit like playing monopoly. You're trading with fake money. I recommend all beginner option traders to paper trade in order to...

  • hone their skills as an options trader
  • build up confidence in their ability to trade
  • and to make the normal beginner mistakes without losing real money

A lot of people discount the practice of paper trading options and some of these same people are the ones I see grumbling because they are losing their hard earned money.

The way paper trading works is that you go through the motions of making a trade without committing any real money to the trade.

This can be done through a brokerage account that offers a paper trading simulator or it can be done with pen and paper.

I started out by just writing my buy and sell orders down on paper and tracking how well I did as if it was a real trade. Then I moved onto using my broker's paper trading software to learn how to work their order screen.

It only makes sense to practice before committing real money. Athletes practice, doctors practice, and so should you. One thing you need to be mindful of is that paper trading options does not reflect reality as far as your emotions go.

There will be a slight emotional detachment to the trade when it's only on paper. Once you start buying stock options with real money, you will notice two emotions drastically increase in their intensity:

Fear and Greed

Just be mindful of this because it WILL be something you have to manage if you want to be a successful trader.

Buying Stock Options

Note: I am primarily a stock option buyer. Therefore, this course will only teach you how to buy stock options for profit. I will not focus on selling stock options for income.

So let's walk through a trade...

By now you should have a good grasp on the first 4 steps, so now we will briefly continue step 4 and then outline step 5: Follow Through.

We will be reviewing a trade on the stock symbol "INFY." I will be reviewing the historical option prices as the trade entry was about two weeks ago.

Here is a recap of what you saw in the video:

  1. The stock pulled back in price and we received a trading signal (slow stochastics) to indicate that a possible trade was on the horizon.
  2. The stock did in fact rise higher, but we waited until the MACD indicator confirmed the movement.
  3. The next day, after we received our confirmation is where we looked for follow through. Our follow through criteria was that we wanted both the stock and the NASDAQ rising higher.

If I were paper trading options, this how my trade entry would look in my trade journal:

ENTRY
INFY $43.08 (closing price) Paper Trade 8/25/09
Jan 45 Call option
Bid: 3.20 Ask: 3.40
Bought 2 contracts: $680 ($340 * 2)
Trading Template: Stochastics and MACD
Support:$40
Resistance:$45

When you exit the trade you then place the exit price and a few details as to why you exited the trade.

Each trader has their own routine and ritual once they are in a trade. Some watch the stock daily, some hourly, and others weekly; it's entirely up to you.

Prior to using Marketclub, I would review my trades at the end of each day to ensure the stock was still behaving the way I wanted it to. Now I just set up trade alerts through Marketclub.

In the next lesson we will focus on exit strategies and review the results of this trade.


Module 6: Trading Options

Module Lessons

  1. Online Options Trading
  2. Best Stocks to Buy
  3. Stock Watch List
  4. Stock Trend Analysis
  5. Stock Option Chain
  6. Paper Trading Options
  7. Trading Exit Strategy/Money Management

Module Instructions: According to how the site is set up, you are now in Module 6: Lesson 6 (Paper Trading Options). For the most effective learning experience, read through each lesson in this module one by one, in the exact same order as they are listed in the table of contents to the left.


Return to the top of this page, "Paper Trading Options"

Return to options trading "Home Page"

New! Comments

Leave a comment below and let us know what you think about this lesson.