Most new entrants to the options trading world — and those contemplating getting in — spend time thinking about how profitable it is. Can anyone consistently beat the markets in the long run?
Options traders can beat the market if they have the right level of skills required to make consistently profitable trading decisions over the long run. The probability of beating the market in options trading is similar to the likelihood of success in other forms of trading.
The rest of this article will cover what it means to beat the market and the ingredients you need to increase your chances of success.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Does It Mean To Beat the Market?
In simple terms, beating the market involves closing most trading years in profit.
Many professionals use the S&P 500 as their benchmark. They count beating the market as any year where they post better returns than the index — not just on profits but also on drawdowns.
If you’re an options trader who consistently achieves better returns than the index, you’re technically “beating the market.”
How Many Options Traders Beat the Market?
A quick look around online will highlight that between 80-90% of options traders lose money. This will put the number that beats the market at around 10-20% of the trading population. However, as a Nasdaq article, titled – ‘Most People Are Dead Wrong About This Strategy…’, and this podcast by Option Alpha state, no verifiable research has validated these numbers:
Still, it’s an educated guess to believe that less than 20% of options traders beat the markets consistently for a couple of reasons.
First, options trading is like any other money-making venture in the world. Since startup failure rates are around 90% (even with the incentives and adequate planning), it’s only natural that the failure rates will be similar in an environment as challenging as options trading.
Secondly, looking at similar trading environments like the CFDs Forex market, where brokers are mandated by regulation to publish failure rates, you can see that only one in four traders make money. The retail traders in the CFDs industry are also likely to be retail traders in options trading, so you can see why many blogs draw these parallels.
However, the reality is that the number of options traders that beat the market is significantly smaller than those that don’t. When the data is eventually researched and published, it’s likely that the 10-20% guess will be proven right.
Does this make the options market very difficult to make money in? Technically, yes. But you can say the same for virtually any field of endeavor in the world.
For example, do you want to become an artist? Three in four make less than $10,000 a year. Do you want to become a soccer player? Only 1.4% of college soccer players go pro. The story is worse for basketball players where only 0.02-0.03% ever get drafted to the NBA.
How Can You Beat the Markets as an Options Trader?
When people become disillusioned by how hard it is to make money consistently from options trading, they tend to categorize the successful traders as “just the lucky few.”
You shouldn’t make the same mistakes. Anyone can beat the market as an options trader by adhering to tried and tested principles.
Below are some of them:
Understand the Market
Options trading is different from clicking “Buy” or “Sell” on your online stock trading app. There are different terminologies and different approaches to trading here.
Spend some time to learn what each one is all about. For example, what is option buying? What is option selling? What does it mean to write or buy puts and calls?
Many options trading resources online have covered these basic terminologies and everything else you need to know concerning options trading basics. Spend some time going through as many of them as possible.
Here’s a good YouTube video that covers the basics in detail:
Once you have a clear understanding of what the market is all about and what basic concepts mean, you stand a higher chance of success compared to a new trader that jumps in at the deep end.
Treat Options Trading as a Business
The proliferation of online trading apps has made trading options look like spending some time down the local casino. Some of these apps deploy heavy gamification in their UX. This has forced many traders to treat the markets with less seriousness than it deserves.
To make matters worse, so many self-acclaimed gurus exist today, holding seminars online and offline to talk about how easy it is to make money as an options trader. Unfortunately, the unsuspecting newbies that attend these events go home worse off.
The “token” you pay for the seminars actually powers the trader lifestyle of the gurus. You’re likely to go home having learned nothing useful. In worst-case scenarios, you could have a damaged trading psyche that will lead to even more losses in the future.
Options trading is as challenging as any other type of trading. It’s not a get-rich-quick scheme or a game. You need to approach it with a professional mentality, treating it as a business. You need to cultivate the necessary patience to get better with every trading week.
Create a Robust Trading Plan Devoid of Emotions
Many options traders fail because they rely on their gut and emotions instead of working with a trading strategy that has a proven statistical edge.
If you have a robust trading strategy, you only need to execute the trading rules when necessary, thus reducing emotional decisions to the barest minimum. Once you have a proven trading system, all you need to do is keep following the laid down rules, and you’re likely to beat the market.
The most successful options trading traders understand the basics of how the market works, just like every other trader. Their success comes down to their trading system and their risk management approach.
A robust trading approach is one that has been proven to deliver above-average returns consistently. If it can post better returns than the S&P Index in backtests cutting across different market cycles, there’s a high possibility that it will continue to work in the future.
Understand the Concept of Risk and Rewards
Failing to understand the concept of risk and reward early enough in your options trading career is one of the main causes of failure. Traders can fail in two ways.
First, losses early in your trading career can make you risk-averse. This will lead to reluctance in taking good positions, instead choosing to hold options with smaller returns because they represent smaller risk. It’s hard to beat the market this way because fewer losses can erode the smaller profits. There’s little room for error.
Secondly, some traders pay too much attention to reward without giving proper thought to their exposure. This method of risk management can work well for a while, delivering some excellent returns. However, disaster is always lurking with such an approach.
Having a proper understanding of risk and reward concepts will ensure you don’t overstretch your positions until you end in a loss. For example, if you’re at $25,000 and you’re scheming on how to reach $50,000 in a few trades, you should circle back and look at how much you’re likely to lose if things don’t go according to plan.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
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Conclusion
Options traders can beat the market if they have the requisite knowledge and can stick judiciously to a robust trading strategy. The trading approach should incorporate sound risk management principles to increase the chances of long-term success.
Remember, beating the market in one month or one year isn’t enough. Your focus should be on achieving your trading objectives over the longer term.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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