An ineffective trading plan shows much greater losses than anticipated in historical testing. He was a senior hedge fund analyst where he helped introduce cutting edge ways to safely manage tens of millions of dollars. Rules should be something well thought out and ones that you will be willing to follow. A Billionaires 5 Rules for Options Trading. Work hard now and the reward will be great at the end of the day. Setting realistic goals is an essential part of keeping trading in perspective.
Rules of the Options Clearing Corporation. (4) Participating Exchange-The term "Participating Exchange" means a national securities exchange which has qualified for participation in the Options Clearing Corporation pursuant to the provisions of the Rules of the Options Clearing Corporation.
What to Trade
These events or catalysts can be anything from: The key is to buy the option before this event occurs, you never ever want to buy an option after the catalyst or event. So in summary only buy an option when there is catalyst or event that will dramatically alter the price of the stock. An easy example of this is Earnings, you only want to buy an option that expires more than a week after the earnings date.
Again this means when you buy an option make sure you leave yourself enough time so that your option does not expire before the catalyst or event occurs. But if its a high priced stock, I will only buy the option it gives me at least 25 times leverage or more on the stock.
Meaning divide the price of the stock by the actual option price. This means you want to buy options on stocks that have moved sideways of flat for months at a time. Look at a chart if there has not been a significant uptrend or downtrend in the last 3 to 4 months, there is a good chance that the volatility in the stock is low and the options are cheap.
You can also use the above idea to trade bear call spreads or calendar spreads if you want. Your broker still just sees covered calls and long calls. You can sell puts a bullish strategy in an account that does not have permission for naked options, such as an IRA, by getting permission for "CSEP" trading from your broker.
CSEP stands for Cash Secured Equity Put, and means that you can sell puts IF you maintain cash in your account to cover the purchase price of the stock if you are assigned on the short put. It is then up to you whether you use the short puts just for short term trades, or ever allow yourself to be assigned on a short put.
Since you can sell puts with the above strategy, you can also trade bear put or bull put spreads. Your broker will see a CSEP and a long put, both allowable. You can set up the combination as a bear put or bull put depending on your outlook for the stock, with the appropriate risk: In a similar manner, selling naked calls a bearish strategy is not allowed in an IRA, but selling covered calls is. As long as you own the stock, you can sell calls against it. It is up to you whether you approach the trading as opportunistic option day-trading or more normal covered call selling.
Your broker won't care as long as the short calls are covered by stock. No matter how you approach it, you must buy the short calls back if the stock ever goes over the strike price you sold, if you don't want to risk being called out of the stock. It is possible for a broker's automatic "matching" system to create an option margin requirement on your account that shouldn't exist. Sometimes this doesn't make any difference, but if you are close to getting a margin call anyway, the mismatch might cause a "false call".
You should call your broker and ask them to either manually match your option positions, or put a notice on your account about the false call. For example, you own shares of XYZ, sell ten covered calls at the 20 strike, and also sell ten calls at the 25 strike, and buy ten long calls at the 25 strike to make a calendar.
Your broker should match the short 20 strike against stock, and the short and long 25 strikes against each other, causing no margin requirement. Questions, corrections, suggestions, comments to: Interested in option calculators or option graphing software? Search option-info and options-graphs sites: Home Option Trading Subjects: Why Trade Stock Options? The Basics of Stock Options How to: Guaranteed Winning Trading Strategies? Learn more about backtesting in Backtesting: Treat Trading Like a Business In order to be successful, one must approach trading as a full- or part-time business - not as a hobby or a job.
As a hobby, where no real commitment to learning is made, trading can be very expensive. As a job it can be frustrating since there is no regular paycheck. Trading is a business, and incurs expenses, losses, taxes, uncertainty, stress and risk. As a trader, you are essentially a small business owner, and must do your research and strategize to maximize your business's potential. Use Technology to Your Advantage Trading is a competitive business, and one can assume the person sitting on the other side of a trade is taking full advantage of technology.
Charting platforms allow traders an infinite variety of methods for viewing and analyzing the markets. Backtesting an idea on historical data prior to risking any cash can save a trading account, not to mention stress and frustration. Getting market updates with smartphones allows us to monitor trades virtually anywhere. Even technology that today we take for granted, like high-speed internet connections, can greatly increase trading performance.
Using technology to your advantage, and keeping current with available technological advances, can be fun and rewarding in trading. Protect Your Trading Capital Saving money to fund a trading account can take a long time and much effort. It can be even more difficult or impossible the next time around.
It is important to note that protecting your trading capital is not synonymous with not having any losing trades. All traders have losing trades; that is part of business. Protecting capital entails not taking any unnecessary risks and doing everything you can to preserve your trading business.
Become a Student of the Markets Think of it as continuing education - traders need to remain focused on learning more each day. Since many concepts carry prerequisite knowledge, it is important to remember that understanding the markets, and all of their intricacies, is an ongoing, lifelong process. Hard research allows traders to learn the facts, like what the different economic reports mean.
Focus and observation allow traders to gain instinct and learn the nuances; this is what helps traders understand how those economic reports affect the market they are trading. Read about 24 different economic reports in our Economic Indicators Tutorial. World politics, events, economies - even the weather - all have an impact on the markets. The market environment is dynamic. The more traders understand the past and current markets, the better prepared they will be to face the future.
Before a trader begins using real cash, it is imperative that all of the money in the account be truly expendable.
Day Trading Options. We explain options, and list the rules and regs that might impact your strategy. For beginners to those trading for a living, we explore Options in depth. Trading Rules A critical part of any option trading system is the trading rules. These rules define what I will and won't do regarding trading a particular strategy. Through this practice, I developed my own trading rules that I'd like to share with you. I have so many rules about options it's not even funny -- and all designed to protect me from myself. For instance, I don't trade directionally with highfliers in options. No Intercontinental Exchange (ICE), CME Group (CME) or Google (GOOGL) -- I just don't do it. I don't trade anything in options that can hurt me.