Welcome to The Stock Market Millionaire podcast. This is episode number 24, Proper Procedure for Paper Trading Options. So I get asked the question all the time, “Rob, how do I get started if I want to practice options trading? You know, it’s not a hard process to go through, right? You basically go ahead. You’ve got to have an understanding of options. I guess that would really be step number one. You need to understand how options work and what they do, right? There’s plenty of trainings that we offer. Come check it out, some of the stuff we’ve got on the website, there’s a lot of free things of course, in our YouTube channel, you’ll find tons of stuff in there. We’ve got some advanced programs as well, but how do you get started iIf you want to practice options trading? It really comes down to picking a broker and starting that trade, but the key to it is going to be this: you really, and I mean really, need to treat this as if it is a real trade, a funded trade. We call them non-funded but you need to treat it as if it’s real. If you do not, then that trade will have havoc for you, a cause havoc for you. What do I mean?
We set up the wrong signals in our brain if we’re kind of cheating our way through, in other words… Well, it’s paper, it’s practice, it’s non-funded so I’m not really, it’s not real, let’s see what happens if it goes another day, you know, and it goes another day and it drops and goes against you. You go, “well, you know, it’s not real, right? So let’s see what happens.” We go one more day and ultimately you go 35 more days until it finally recovers. And you do something that you never would have done had it been real money, right? So, when you get started practice trading with options, make sure that you are treating it as if it is a real trade. That’s going to be critical. Write that down. If you don’t already have it. If you’re taking show notes, make sure you jot that down.
Next question is ,”Rob, where do I find an options trading simulator?” You know, just about not all, but just about every broker out there has an options trading simulator, that practice or paper trading module that you can use. Couple of things you want to make sure of when you find that broker that you’re going to deal with. You want to ask the question, is the simulator that you have the same as your funded trading? Well, what does that mean? In other words, when I learn how to use the simulator and I get all of my practice trading out of the way and I want to transition to fund the trades, is it going to be exactly the same, or don’t have to learn a new platform? And I mean exactly the same, not well, it’s just about that. No, no, no, no, no, no, no. The only thing that should be different between a funded and a non-funded account for practice trading is the account number and the balance. That’s it. There should not be anything different about those two platforms. There was a company I dealt with way back in the day called Options Express. They did an amazing job. For the timing of where they came in. They were a great brokerage firm, but they could not – it took a very long time for them to ever transition from having two different systems. I just learned how to do it all on practice, and then you change how I do it with real money. Made no sense, because you’re making mistakes, you got muscle memory, right? You’re hitting enter. Now you have to learn how to hit it or a different way. Right? It’s not like this, it’s like this, or you get the point, right.
Is practice really important? Well, yes it is. Why? Because perfect practice makes perfect, not practice makes perfect. That is such a lie that we are taught as little tots, right? Oh, perfect practice makes – no, no, no, no, no, no, no. You practice it wrong over and over and over again, it’s wrong. You didn’t do anything. Oh no. I got really good at doing it wrong. Yes you did. So yes. Practice is ultimately very, very, very important to you as a trader, right?
Can I start paper trading options with any broker? As I said already, not any broker. I would definitely pick one of the majors and look at the features of their non-funded accounts and see what they are. In other words, there are brokers out there that give you some advanced features. I’ll give you an example. If I have a stock that’s trading at a hundred dollars and I buy a call option, I think it’s going up to 110. Well, I don’t want to get out right at 110; I want to get out somewhere below there. So, let’s just pick 109 for the meantime. Well, I want to be able to get out when the stock gets to 109. Now, could I use delta and gamma to calculate where the option price will be there? I can. Can I use Vega to calculate a little bit of volatility? I can, but all in all, when it’s all said and done, it’s a guess, because what you can’t calculate is news that came out. Shift market volatility. You’re going to constantly reevaluate volatility and everything else on a intraday basis over and over again? It’s too much. I want to say, “Hey, when the stock gets up to 109, get me out of my option at market, whatever the price is.” Yes, at market, because I know where the stock is going, or I know where I think the stock is going, so let’s get out based on the stock price, not on the options price. So I want to make sure that my broker has those features in there.
There’s a broker out there that they are fantastic, and that’s the only thing that they don’t have. I like some of the major companies out there – the TradeStations, the TOS, the Interactive Brokers, right? Each one, having their own benefits, their own things that are better. But they also all have some of the things that are, that go against them. TradeStation, their customer service, as of this recording is not very good, right? TOS is a little more complicated for me to set something up on there than it is on TradeStation. I find that a lot easier. TOS allows you to have multiple instances open. You can have more than one time, you can open TOS up. TradeStation only allows one. TOS, you could open a practice and a funded session up. You can’t do that on TradeStation. There are goods and bads to every one of them, right? TradeStation, I find their advanced orders a little bit easier than TOS, Interactive Brokers. They are massive, right? They’ve got a huge amount of information there, right? Probably a lot of things that you would never use, so it’s just a matter of finding who you’re comfortable with to work with there. But practice, practice, practice is important and make sure that you’re practicing with the right options broker.
Now what about strategy, Rob? Does it matter the strategy that I’m talking about? Nope. It really doesn’t. Now do I think there are some that are easier and better to start with than others? Yes, I do. I think buying calls and puts is the strategy to start with, but I had one of my students many, many, many years ago, start off with spreads, credit spreads. And here’s the funny thing. He didn’t do bull put spreads and bear call spreads. He just did bull put spreads. Why? Because he didn’t understand bear call rates. He couldn’t wrap his head around the market, going down and making money. He couldn’t. So, bull put is all that he did. Right? The only strategy he ever learned was it, was he the exception to the rule? Yes. Most of my students don’t learn credit spreads first. They learn how options work first, and then they add credit spreads to the mix.
Now how long should somebody practice or do non-funded trades, Rob, before they go live? You know, it’s funny. I just did a YouTube video on this as well so you can check that out on our channel. But, how long have you practiced for do non-funded trades for is, you’ve got to start off with the non-funded trades, getting a system that you’re comfortable with working your way through the process, and then once you work through that process then, and only then should you transition and go live. There is no steadfast for everybody. I’ve seen people do it as fast as 20 and 30 days. I’ve seen others that take months to transition over. There is no right or wrong. It’s, how long do I study for a test? You know, period, you may study for two hours, I may study for four. Someone else may study for one, my daughter’s boyfriend doesn’t study at all. And he’s a nurse, right? No, no, no, no. I don’t need to study. I got it in class. He’s just, he knows it. He doesn’t have this. I hate people like that, by the way. They’re like being on jeopardy. Right? I love the people on jeopardy. My wife and I watch it every night and I tell her at seven o’clock Eastern time and I look over and I say, “I feel stupid” is on, because that’s exactly how that show makes me feel. I love seeing all the things they come up with. And every once in a while they come up with stock market stuff and I’m like a hero to my family. Hey dad, you got all of those. Yes. Dad knows! But you practice trade until you are comfortable to go live, and then when you do go live, you go live in a very small fashion. Just start off slow with one contract when you go live and build your way up to what you’re trying to accomplish.
And there you have it, ladies and gentlemen make it a profitable day. Stay focused on the quest to becoming a great trader, keep crushing it. And remember you’re just one trade away, take care. And I’ll see you at our next update. Bye for now.