I’ve gotten a lot of questions about how I trade options lately. Many of those questions are really roundabout ways of asking if I have any hard and fast rules for trading options. I don’t have many rules that I consider “hard and fast,” but I do have three. So I thought I’d share them with you here.
The rules I share here don’t guarantee that you’ll make money. In fact, you may lose money if you don’t have a solid trading strategy. I share these rules simply to give you some insight into my unique style of option trading.
Keeping this mind, here are my 3 rules for option trading success…
1. Don’t hold an option near term. 2. Don’t buy out-of-the money options. 3. Don’t hold an option until expiration.
The way these are written, it sounds like a list of what NOT to do. And it is. But these three rules can also be rephrased in a positive way…
1. Always buy options that don’t expire for a long time. 2. Only buy deep in the money option contracts. 3. Always dump option contracts before they reach expiration.
These three rules are the only “black and white” rules I use in my trading. After that, it depends on the chart pattern I’m trading. There simply aren’t any rules that can address the unpredictable forces of the market.
Put another way, I do have additional “rules” I depend on. But they’re contingent upon a number of variables and factors that require close scrutiny and analysis.
Perhaps my three option trading rules have given you a new angle to look at trading. After all, much of the popular advice involves trading the news — something I don’t advise. News is only one factor you should consider in your trading. You should never base trades on news and news alone.
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