Wednesday, October 3, 2007

Rules for Options Trading

Options’ trading is a craft and if you learn the rules of the game - possibility of success increases. Here is my list of rules...

  • Always Have a Plan I have to give Mr. Dan Sheridan credit for drilling this into my trading psyche. If I cannot articulate the plan to my neighbor then I have to reconsider my options. You need to know what you are doing, why you are doing and how you intent to make money.
    » Understand the trade, the stock, the market, the strategy, profit/loss potential and risk profile.

  • Know Your Exits This extends the planning process and entails knowing when you want to exit the trade. I still struggle with this one by getting out too soon or staying too long.
    » Define your exit points (both profit and loss) when you execute the trade.

  • Cut Your Loss Early If you have an exit point and you hit it when the trade is not working out - get out! I know - its easier said than done and I have lost big many times but I believe in this concept.
    » Exit the trade when you hit the loss point.

  • Don't Bet Against the Market In general the market will win. Taking a contrarian approach when you have a short time horizon is not the best trading strategy.
    » Bet with the market.

  • Don't Leg Out of Spreads It's tempting but the safer and more prudent approach is to close out the whole spread. Legging out exposes you to enhanced risk of the remaining leg moving away.
    » Follow the plan!

  • Patience You have to monitor your trades and adjust as needed but obsessing over them does you no good. Market will fluctuate and as long as the trade stays within your parameters - let the trade mature.
    » Follow the plan!

  • Other Misc Other rules include - always keep learning, it's never too early to take profits, have an adjustment strategy as part of your plan, follow your gut, don't get greedy, learn and move on - there is always another trade.
    » Don't lose the money!

Look forward to hearing your comments, suggestions and rules of trading.

1 comment:

Jan Deen said...

Smart traders use the greeks to their advantage. Knowing and applying the greeks to your options trade reduces the risk and makes your trades more profitable.