- 1. Let's assume that you have a $5,000 account for
the purpose of option trading. If you have a smaller or bigger
account, adjust the numbers accordingly.
- 2. Money management plays a far greater role in successful
trading than the ability to pick a good entry or
exit point. It is very important not to invest more
than $600 - $700 in any one position so that you have
enough capital to spread over 7-8 trades. For bigger accounts we would reduce the share of funds invested in any one trade even further. So if you
want to buy, for example, a $1.5 option, buy no more than five contracts,
for a $1 option buy 5 or 6, for a $5 option buy one contract, etc.
- 3. It is very important to allocate an approximately equal share of funds for each trade.
- 4. Never maintain more than 2 or 3 positions at any
given time. It is very difficult to monitor more than
2 or 3 positions simultaneously, especially if you have
a full time job.
- 5. In some
rare cases the position will open in the morning with a profit of
several hundred percent; take it immediately, don't wait for our alert.
- 6. Do not try to chase the market. If you need to
get out of a long option position, place the limit sell
order at the bid price. If you need to get in, place
the limit buy order at the ask price.
- 7. Do not use a market order except in an extreme situation.
Be prepared to possibly get a much worse fill in this
case.
- 8. If for some reason you did not get into a trade, do not get into it after the fact if it trades at a much higher price. Wait for the next trade.
- 9. When we enter a trade, we sometimes will place
a mental stop at the 50% level. You may use actual
stops but keep in mind that an option can lose or gain 50% in a matter of minutes or even seconds at times.
- 10. Option trading is very risky. You may lose all money
invested in long calls and puts plus commissions. Consider
your actions carefully. Past performance is not
a guarantee of future results.
