A number of my readers have been asking me how I trade options. A lot of the questions I've received indicate people are looking for firm rules they can use. Frankly, there aren't many "hard and fast" rules I use. Although I do have three that I'll share with you.
The rules I share here don't guarantee that you'll make money. In fact, you may lose money if you don't have a solid trading strategy. I share these rules simply to give you some insight into my unique style of option trading.
Keeping this mind, here are my 3 rules for option trading success...
1. Don't hold any near-term option contracts. 2. Don't buy option contracts that are out of the money. 3. Never hold an option until its expiration date.
Instead of a list of things NOT to do, you can think of these from the flip side...
1. Always buy options that don't expire for a long time. 2. Only buy deep in the money option contracts. 3. Always dump option contracts before they reach expiration.
These are the only "hard and fast" rules I follow when trading options. From there, it depends on the underlying stock set-up. And there aren't any black and white rules that address the dynamic forces in the market.
Put another way, I do have additional "rules" I depend on. But they're contingent upon a number of variables and factors that require close scrutiny and analysis.
Perhaps my three option trading rules have given you a new angle to look at trading. After all, much of the popular advice involves trading the news -- something I don't advise. News is only one factor you should consider in your trading. You should never base trades on news and news alone.
About the Author:
A.J. Brown is a published author and option trading coach. He has been actively trading for nearly a decade, and has trained hundreds of students how to trade options. Go to his blog to learn more about trading stock options.
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