The 5 Laws of Options Trading Everyone Should Obey

Most new investors think the options market is a place to take small accounts and virtually overnight turn them into fortunes.  This is one of the hardest things to retrain, because the truth is further from that reality.

In fact, more than 90% of options traders, unsophisticated ones, lose money.  This is something that has been talked about forever but never really substantiated.

There at five trading rules that have become part of the fabric of great traders.

Now the difference between a good trader and a bad trader is as simple as this: bad traders think of ways to make money and good traders think of ways not to lose money.

Most people think they are long term investors, but in reality they act like terrible short term traders.

Here are some rules (laws) you can use to help navigate the world of options trading.

1. When you double your profits, take your profits off the table.

100% returns are rare, and since they don’t happen with any type of regularity, do not be greedy.

2. If you do not want to take your profits, sell at least half of your position.

This is something I do when playing games at casinos and it is an almost foolproof way to walk away from the table a winner.  When I play at blackjack for example,every time the deal pays out on a 21 or I win a big hand, I take half the bet and put it in my pocket.  What’s left on the table is house money.  Keep putting it in your pocket and the profits will pile up.

3. If you are the buyer, time is your enemy.  If you are seller, it’s your friend.

Options are a depreciating asset.  The closer you get to expiration, the more the price of the asset will go down.  So as the the buyer, it is really helpful to keep this in mind.  Some investors sit on positions even when they are loser, hoping that it comes back.  Don’t do that.  Sell out of a loser and you will be much happier in the long run.

4. Do not get emotional about your positions.

This is one of the hardest things for a trader to do.  It is so easy to fall in love with a position that more than anything else, this is the hardest rule to follow.  If you are sitting on a winner and tell yourself it will get better, don’t listen.  Sell it, take the profits and be happy.  Bears make money, bulls make money and pigs get slaughtered.  Or better, don’t snatch defeat from the jaws of victory.

5. Roll over little doggy.

If you must stay in the market, think about selling one position and buying another at either a higher/lower strike or a further out expiration.  At least in this scenario you will take some money off of the table.  You do not want to sweat a position hoping for the right conclusion.  Be in control, because that’s precisely why options are a great investment tool.

The key to this post is that you need to discipline.  If you lack that discipline you will not bank profits.  And since banking those profits is the key objective to trading, gain discipline.  Makes sense doesn’t it!

— The Option Specialist

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