Option Trading Strategies – Tips for Profitable Trading Part I

Option Trading Strategies –  Tips For Profitable Trading

Most folks I talk to know about the stock market and have purchased a stock or two, many have a large portfolio of stocks, but confess they know little about stock options and why one would invest in them. Stock Option trading is a great way to invest in the stock market without having to invest in the underlying stock.  Stock option trading comes with its own vocabulary and you would be wise to learn as much as you can before jumping in.  A good reference for the basics is Understanding Options by Michael Sincere.  My advice is to read as many books on option trading as you can get your hands on.

See my recommended Resource List located at the end of the article.

This article is going to assume you know the basics of stock option trading and talk specifically about tips that will help the novice to experienced trader make a profit from option trading.

TIP 1 – Educate your self.  Read as much as you can, both on line and hard copy publications/books.    See the resource list at the bottom of this article for some of my personal favorites.  Take a class, online or real time.  Get coaching.  Some instructors also provide one on one or group coaching with their educational offerings.  Prepare yourself, arm yourself with every thing you can to be ready to trade for profit.  All new traders make mistakes, but you can greatly minimize errors with knowledge.

Tip 2 – Have a strategy.  One of the biggest mistakes new traders make is to start trading without following a tried and true strategy.
Spend the time, energy and money to learn a good strategy that works for you.   Implement a strategy that takes into account your risk tolerance, your time available to trade and your long term interest in trading.  If you don’t think it’s fun, or can’t take the pressure, find another line of work.
The strategy I use has been tested for a number of years and works.  It works in up markets and down markets.  It works through a market crash.   More importantly it works for me.  The strategy I use guides me to know when to enter the market, when to exit, when to use profit lock and stop loss strategies.  Learn more about my strategy.

Tip 3 -  Have discipline.  Now that you have chosen the strategy that works best for you and have invested the time and money to learn everything you can about the strategy, you have to stick to it.  Most new traders get into trouble because they deviate from their strategy.  I don’t know what it is about human nature that we find ourselves doing things we know we shouldn’t.  Option Trading is not for everyone, psychology plays a huge roll in trader success.   I have a good friend who also trades options using the strategy that I use.   Early on in our trading he placed a trade that almost got him into trouble.  He knew the strategy, but ignored it, just that one time because he felt as if he had done the analysis he needed to eliminate the risk and make just a tad bit more money.  Fortunately for him, he is also very lucky, but one day his luck will run out if he doesn’t go back to basics and follow his strategy.  Without fail.  Which leads to my next tip.

Tip 4 – Don’t get greedy.  The strategy I use nets me about 8 – 12% a month.  Yes, that’s a month.    Now let’s face it, I’ve got tons of other investments that I’d be happy making 8% a YEAR, much less a month.  So if I can consistently get that rate of return, each and every month, do I really need to get greedy, take more risk and make more?  There have been some months when I’ve made upward of 15%, but honestly, I can make 5% a month and be perfectly happy with that result.  The point is, when the strategy is working, month after month, and you see that you could have made more money, taking a little more risk, month after month, resist the temptation to take that extra risk.  Cause if you do, it will come back to bite you, hard.  Just don’t do it… Want to learn more about my strategy?  Click Here

Tip 5 – The abundance of really good option trading software link to option trading software post  makes the process of placing trades easy and fast, without the need for human intervention.  With the ease of use of on-line option trading software comes the frequency of errors when making trades.  To ensure you understand how to use the software, read the users guide, Paper Trade (link to Papertrade post) first and create a checklist that you follow for each and every trade you make.  I’ve been trading for a while now, and I still occasionally forget the very basics and miss something, placing an incorrect trade.  I use ThinkorSwim as my trading software.  www.thinkorswim.com.  My checklist looks something like this and is posted in my office above my computer screen so I always reference it.

Items to Double Check For Every Trade

1. Strike Prices
2. Number of Contracts
3. Net Profit From Trade
4. Commissions Paid
5. Percentage Profit From Trade
6. Limit or Stop?
7. Day or GTC Trade

Please send me your favorite reference sources and I’ll include them in my Resource List.

Resource List:
Understanding Options by Michael Sincere
Options Made Easy by Guy Cohen
The Bible of Options Strategies by Guy Cohen
The Rookies Guide to Options by Mark Wolfinger
Option Spread Strategies by Anthony Saliba
Trading for a Living by Alexander Elder

Want to learn more tips?  Check out  OPTION TRADING STRATEGIES – TIPS FOR PROFITABLE TRADING – PART II  Click Here