9 Easy Tips for Option Trading Success
Most investors who are looking for ‘tips’ for option trading success have the wrong perspective. They seek tricks, special strategies, or ‘can’t-miss’ gimmicks. There are no such things.
Options are the best investment vehicles around. They allow investors to take long, short, or neutral positions. They allow you to manage risk far better than any other investment method. Use them wisely and they will treat you well.
Option Trading Success Tips
Here are nine easy tips for new options traders to follow if they want to be successful.
1. Options are best used as risk-reducing investment tools, not instruments for gambling. (Read my article, why trade options?)
2. Use the options Greeks to measure risk.
3. Manage risk carefully. Do not hold any position than can – in the worst case scenario – cost more than you are willing to lose.
4. Be careful about the number of option contracts you trade. It’s easy to over-trade with inexpensive option contracts – especially when selling.
5. Don’t go broke. Never allow an unexpected event to wipe out your account.
6. Do not expect miracles. Do not buy options that are far out of the money just because they are ‘cheap.’ The chances of success are tiny. Not zero, just tiny.
7. Selling naked options is less risky than buying stock. But, like stock ownership, there is considerable downside risk. Exception: It’s reasonable to sell naked puts – but only if you want to buy the shares, if assigned an exercise notice.
8. Limit losses. The most effective way to accomplish that is to buy one option for every option you sell. That means selling spreads, rather than naked options.
9. Hope is not a strategy. When a position goes bad, consider reducing risk. Doing nothing and hoping for a good outcome is nothing more than gambling.
Mark Wolfinger is a 20 year CBOE options veteran and is the writer for the blog Options for Rookies. He also is the author of the book, The Rookie’s Guide to Options.
Further Reading, Options Trading:
- Investors Guide to Trading European Options
- 6 Great Option Strategies For Beginners
- 7 Reasons Investors Should Trade Options
- Options Basics Quiz
- Entering an Order to Buy or Sell Options Investor Series, Part I
- Your First Options Trade: Writing Covered Calls
The chief losses of the many new investors experience is the lack of adequate knowledge of the investment market they are in.
Surely this masterpiece have have taking care of that
Despite the sarcasm, I disagree completely.
The chief losses occur because the investor does not know what he/she is doing and takes on far more risk than can be handled.
The best thing about options is that they can be used to measure and manage risk.
Manage risk. That’s the key concept. It’s doesn’t matter what market you are trading, if you manage risk successfully. I stick with equities because stock options are powerful tools.
Great advice. Just learning about stock trading and your article is very helpful. Thank’s
Have the patience to learn first and trade later.
Glad to be helpful