3 Rules to Trade Options By
I can’t tell you how many times I’ve heard investors give up on trading options because they got burned.
I don’t want that to happen to you.
So today, I want to walk you through a basic blueprint to ensure you have the best experience possible trading in the markets.
This blueprint fixes all the negative comments I’ve heard about options — being too risky or chock-full of too many losses.
All you have to do is stick to these three rules…
Rule No. 1: Never Put All Your Eggs in One Basket
Now, this may be the most important rule to follow.
New traders fall into this trap all the time. They buy an option worth a large portion of their investment account.
You wouldn’t put 50% of your portfolio into a single stock, would you? You shouldn’t do it with an option, either.
We’ve talked about how important it is to diversify with stocks. That means diversifying your options positions is important, too. And spreading your capital out to as many options trades as possible will put you in the best position for incredible gains.
Even if you have a profitable strategy, you are still going to see losing trades every now and then.
Believe it or not, I see it happen all the time.
A simple way around it is to make sure you’re never putting all your eggs in one basket.
The saying clearly defines risk when it comes to investing. If all your eggs are in one basket and that basket falls or is stolen, you’re left with nothing in the end.
Remember, no options strategy is perfect. We all have to weather the losses. And spreading your capital out is the best way to stay in the game and be successful trading options.
Rule No. 2: Follow a Profitable Strategy
I can’t reiterate this enough. Follow a sound approach.
It’s the main concept we cover in the Weekly Options Corner, reviewing the profitable strategies I’ve found in the stock market.
So many investors just buy options for the heck of it.
Say they buy a new iPhone today. That means they believe the manufacturer of their new phone, Apple, must be doing well. And they think: Let me buy call options on Apple right now.
But the speed that options can move doesn’t leave any room for “winging it” like this.
That’s why the second rule is to follow a profitable strategy.
Find one that brings in consistent profits … and stick with it. There are still going to be losers. But if you ride out the good and the bad on a solid strategy, you come out way ahead in the end.
Because options can produce profits of 100%, 200% and even 500% or more in a short amount of time. And the most you can lose in any one trade is what you put in to buy the option — 100%.
With the potential for much bigger wins than losses — and following a strategy that produces more winners than losers — you can grow your account rapidly with options.
I’ve said before that my favorite strategy for options is the approach we use in my Quick Hit Profits service. If you haven’t seen how it works yet, I put together a presentation walking through the ins and outs of the approach. Click here to see how it works.
In the end, it’s a strategy you know has been proven to pull you out of any slump the market may take you through.
That’s how you capitalize on options: by sticking to a profitable approach.
Rule No. 3: Don’t Be Afraid of Heights
Stocks can run high, but options can run even higher. Don’t be afraid of rapid gains.
They are what we live for.
A triple-digit gain is just the start. You stand to rack up gains of 200%, 300% and even 500% or more in as little as a couple of months every year. Some options traders have even hit 1,000% gains in a matter of weeks. So, that’s not out of the question, either.
The challenge becomes letting your gains ride.
You see a 100% gain and you tell yourself: This is a nice, quick return. I should lock in my profits today.
This is where traders end up failing: They let their losses run and cut their profits short.
So many times, a trader will see a 20% loss and let it run, thinking it will come back. And with options, they can come back fast. But the psychology reverses when we talk about gains.
Just because an option is up 100% or 200% or more, doesn’t mean it doesn’t have more room to run. If you’re taking profits off the table too soon, you’ll never see the full potential of options.
You can’t be afraid of big returns.
So, as a quick recap, the first (and most important) rule is to never put all your eggs in one basket. Spread out your capital instead. My second rule is to follow a profitable strategy — and stick to it. And the third rule? Don’t be afraid to let your profits run. Gains are your friend, so don’t be afraid of them.
If you follow these three simple rules, it’s as close as it gets to guaranteeing a great experience trading options.
That’s all for today’s Weekly Options Corner. I’ll be back next week to break down a recent trade for my Quick Hit Profits service, giving you a detailed look at the ups and downs that can happen with options.
Chad Shoop, CMT
Editor, Quick Hit Profits
Investing has consumed my life since college. While double majoring in finance and economics at the University of North Carolina at Greensboro, I founded the university’s economics club, joined the finance club and participated in the Chartered Financial Analyst research competition to represent our school.