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The big advantage of options trading is that you can wield outstanding leverage no matter how simple or advanced the strategy
— and you can do so with limited risk, i.e., you can only lose what you pay for the options. Talking about taking losses — no
matter how small — isn’t fun. However, managing losses is key to the “other side” of the equation — making money on successful
trades.The key advantage of options trading is that it gives you a way to buy stocks at a lower price. You invest less, which means
that you position yourself to make much bigger percentage profits. So, what are the keys to astoundingly big and easy options
profits?I have developed 10 simple “commandments” that you can use to improve your options trading in both bull and bear markets.
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Commandment #1: Be Patient
You must wait for options to become underpriced.
There are many opportunities out there, but if you want the best-possible risk-versus-reward picture, look for stocks that are
about to break out (or break down), buy their options cheap and sell them when they get up and run.See the Top 7 Reasons to Trade Options.
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Commandment #2: Diversify
Don’t put all your eggs in one basket. Try to invest the same dollar amount in different positions to lower your risk.
Also, buy puts and calls on several stocks in myriad industries, and be sure to spread your purchases throughout a 12-month
period so that you’re profiting year-round and/or so that you’re not getting hit with losses all at once if the market hits a
rough patch.
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Commandment #3: Minimize Your Risk
Pay as little as possible for each option. And always be ready to cut your losses should the need arise. Generally you should
sell a losing option if it drops by 50%.Don’t gamble away your profits. Learn when to exit an
options trade.
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Commandment #4: Plan Before You Play
If you do not have a game plan for when you will enter and exit a trade, it will be more difficult to consistently turn a profit.
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Commandment #5: Don’t Be Greedy
The downfall of 90% of all options investors is greed.
If a trade runs up and then the stock pulls back 3%, close the position and enjoy your profits. Otherwise, the stock might keep
dropping and you may take less of a profit, or even a loss.
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Commandment #6: Maximize Your Leverage
One option contract controls 100 shares of the underlying stock. Try to find options that will increase in value by at least
100%, which is a perfectly reasonable expectation if the underlying stock moves up by even just a few points.Learn the secret to Closing Out Option Trades for
Triple-Digit Profits.
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Commandment #7: Buy Options on High-volatility Stocks
Because options expire, you only have a limited amount of time to work with.
So, your best plays are on volatile stocks that move within wide ranges of their base values.
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Commandment #8: Buy Out-of-the-money Options
In general, out-of-the-money options normally have lower prices, and, as a result, they also tend to come with less risk.
But don’t buy them too far out of the money. It’s one thing to bet on a stock moving, but it’s a fool’s game to expect an unrealistic
jump (or drop) within a short time frame.
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Commandment #9: Don’t Overpay
Successful option buyers are meticulous bargain-hunters.
Wait for your price and don’t be afraid to pass on a trade that seems too expensive — there will always be new trading opportunities.
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Commandment #10: To Everything, There is a Season
That is, earnings season, conference season, new-product season, etc.
In our second commandment, we encouraged you to spread your option purchases throughout the year. However, keep in mind that
there are slow seasons and busy seasons. So be ready to take advantage of “extra” opportunities by saving up for them rather
than buying options just for the sake of doing so.
