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Options Trading Tips

  • 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.