How To Trade Options; Patience and Discipline Are A Necessity 

How To Trade Options

How To Trade Options

Before we get into the strategy one can put to use in terms of Buying and or selling Options, let’s cover the basics first.  Options can provide an investor with spectacular returns, and therein lays the problem as most investors only focus on the possibility of locking in huge gains.  They never deal with the possibility of facing equally huge losses.

  • Ideally, one should wait until one has banked some profits via stocks before getting into options. Barring that, one should start off small and only deploy 1/3rd to 2/3rds of their funds into a position.   Each trader is advised to divide their funds into equal lots and each of these lots is then divided into 3 smaller lots and deployed at separate entry points.
  • Focus on longer-term options; generally, leaps are considered almost as safe as stocks (please focus on the word almost) due to the “time premium:” You will pay more for the extra time.
  • Never over-allocate funds to a given position.  Divide your money into equal lots and deploy the lots equally.
  • Follow the instructions precisely; don’t be eager and modify the instructions unless you are attempting to get a better price.

These strategies reduce risk and improve one’s odds of winning

For example, if you have $3K to invest and you are buying options on stock valued at 10.00, then purchase 3 contracts as three contracts control 300 shares. $3k invested into stock priced at $10 would enable you to purchase only 300 shares.

If things go south, you will not lose the entire $3K, and you will live to fight another day. As options can provide spectacular returns,  even if you lose 50% or more of the original $3K, you still have the ability to recoup the entire sum or more with one home run. However, if you put the above strategy into play your losses would be significantly less.  In the above example, you would purchase only three contracts, and the premium for an option with a strike price of 12 and 12 months of time premium would cost in the $2-$3 ranges, so if you had to lose your entire stake, you would lose between 600-900 dollars.  You should never invest the same amount of money in options as you would allocate to buying shares; if you do that, its a recipe for trouble.

The main point to understand is that discipline is of paramount importance when it comes to dealing with options. Do not trade in an erratic manner and do not allow your emotions to take over.  Most importantly never over-allocate funds to any given position.

Options trading should be part of your winning game strategy

Options should never represent 100% of your attack plan; the markets are ruthless, and those who think they can outsmart the markets always end up at the bottom of the barrel. Portfolio management is of outmost importance. Options trading should only be part of your investment strategy.  Remember that the markets are ruthless when it comes to dealing with arrogant individuals. Steady but sure; that should be your motto when it comes to option trading.

How to Purchase options on a stock if we have not issued an Option Play

On average we expect the play to tack on 20% to 35% in gains.  Hence this simple data can be issued to calculate what strike price to aim for. If you are being conservative, you can target a price that is 20% above the suggested entry price. For example purchase the AMKR Jan 2020, 10 calls when the stock trades at 9 or better, but the stock is currently trading at 10.00.  In this scenario, one would aim for an option with a strike price at or close to 12.00. You would target an option with a strike price of 12 or better. If there are no options with that strike price then you can higher or lower depending on your budget. In this case, you could go for an option with a strike price of 11 or 13.

In general, we would not aim for an option that is trading 30% or more above the current price of the stock. In this case, the highest strike price we would aim for would be 13.00. Once you have enough experience you can modify this strategy to suit your needs.

Other Articles to Read

Tactical Investor Trading Suggestions

Portfolio management process; Ideas On Becoming A Better Trader

Tactical Investor Stock & Option Selection Process

Important Info To Read Before Getting into Options 

How to Purchase Options on Stocks we have not issued any plays on 

How To Sell Puts

Brain Washing and the manipulative media