Summaried below are some of Option Investor's winning trading axioms for successful options trading.
- Never put all your money into one play. As soon as you do
Murphy's Law will take control and you will be broke.
With a $2000 account put $1000 into two plays. $5000 should
divide into 3 plays, $10,000 = 3 to 5 plays maximum. I
strongly recommend NEVER playing more than 3 to 5 positions
at one time. You cannot watch more than three and act
decisively when the situation demands action.
- Never hold a position over an earnings report. Historically
the number of stocks that rise substantially after an
earnings report is less than one in ten. Sure there are
a rare few that gap open on great earnings but far more
gap down. To gap open they must beat the whisper number
by a LARGE margin AND have a good conference call. To go
down they only need to meet the whisper, meet the estimates,
miss the estimates, prewarn any problems or just plain
not be positive enough in the conference call. Traders
leaving after playing the earnings exert enough pressure
on the price as it is without bad news. Exception: Neutral strategies like straddles and strangles can benefit from any post-earnings volatility
- Never play deep OUT OF THE MONEY call options. Sure they
are cheap but they are cheap for a reason. They are like
playing roulette and betting on any one number. If you
hit the payoff is 36 to 1 but the odds of being hit are
38 to 1.
- Never put in a MARKET BUY before the open. You will more
than likely get filled at the high of the day. Enthusiasm
is rampant at the open and everything costs more (as a rule)
than it will an hour later.
- Never place a market order for a thinly traded option. You
may take out the current ask and be very shocked at how high
the next ask was. Several times I have seen fills more than
$2 over the current ask quote.
- Always pick a sell price you would be happy to get BEFORE
you buy an option. Immediately after purchase place a limit
sell for that price. You will be surprised how many times
you will sell on an intraday spike that you did not expect.
See #5 for why. Decide how much you are willing to risk on
the trade BEFORE you make it. Sell when that limit is reached.
Ask anybody who ever had an option expire worthless. They
will all tell you now "they wish they had sold". At the time
emotion will always convince you tomorrow is turnaround day.
Hundreds of thousands of contracts expire worthless EVERY
month. Turnaround never came for them.
- Never bet against the market/sector. The trend is your friend.
It does not matter why the market/sector is going down you
will still lose your money. 85% of stock movement is due to
market/sector movement not stock fundamentals.
- Always sell when you pass 100% profit. If you still like the
play take half the money and buy back in at a higher strike.
Once you sell they can't take the profit away from you. Don't
play 100% of the money again. Double or nothing will eventually
get you nothing.
- Emotion is your enemy, logic is your friend. Never trade on
emotion. There is no such thing as "it has to go up", "it
can't go down". The market does not care what you think or
hope. It is ruthless and makes its own rules. You should say
this 50 times a day, "past performance is not a guarantee of
- Never buy on impulse. If you just heard the news, it is already
to late. Plan your buys during non market hours. Once the bell
rings your mind is clouded, emotion takes over.
Plan your strategy, execute your plan. When in doubt, stay out.
- Cashflow is king. It is very easy to make 25% every two weeks
but very hard to make 100% routinely. 25% on $1000 every two
weeks for a year is $6500. (without benefit of compounding)
Take a profit over and over and over.