He did it by following a strict set of trading rules he calls his Ten Commandments of Option Buying.
You will greatly increase your odds of success if you follow these guidelines:
1) Be patient. This is the most important commandment. Decide how much you are willing to risk in options over the next twelve months. Then, don‘t commit all of it right away. Spread your trades over an entire year.
2) Diversify. Don‘t put all your eggs in one basket. Take at least two or three positions, and buy at least four contracts per position to reduce commission costs.
Try to invest the same dollar amount in each position, to eliminate the risk of having small investments in the winners and big investments in the losers.
Also, buy puts and calls on several stocks. Market variability is a major risk of option buying. If you buy calls and the market declines, you could be wiped out. You should always have some bets for both bullish and bearish scenarios.
3) Minimize your risk. Pay as little as possible for each option. And always be ready to cut your losses should the need arise. Generally you should sell a losing option if it drops by 50%. Take your loss and move on.
The ability to cut losses is a key determinant of whether you will be a successful trader or not.
4) Plan before you play. If you do not have a game plan it will be more difficult to profit. Know before the fact the price at which you will buy an option, take profits or exit the position.
5) Don‘t be greedy. The downfall of 90% of all options investors is greed. To avoid this natural tendency make sure you follow your game plan. Force yourself to wait for the right price by using limit orders to buy options.
6) Maximize your leverage. One option contract controls 100 shares of the underlying stock. Try to find options that will increase in value by at least 100%. Buying cheap, undervalued options is the first step in this strategy.
7) Buy options on high volatility stocks. You have a limited amount of time to work with, so your best plays are on volatile stocks that move within wide ranges of their base values.
An option’s price factors in this volatility. When we recommend an option, often times it is undervalued because the market has mispriced it based on the stock’s historical volatility. In other words, the stock has the potential for bigger price swings than the market is giving it credit for, so your chances of profit are higher.
8) In general, buy out-of-the-money options. These options normally have lower prices, and as a result less risk. If it is underpriced because of volatility factors, it has a greater chance of going in the money and increasing in value.
9) Buy undervalued options whenever possible. Successful option buyers are meticulous bargain hunters. Wait for your price, pay no more than that price, and make sure the price is below the option‘s true value.
10) Be patient. This is the most important commandment, and it bears repeating. You must wait for options to become underpriced.
Contrary to popular belief, buying speculative options is not a game that requires action everyday.
Players looking for this kind of action usually are not around for very long. Successful options buying requires patience and selectivity. It is the only way to win this game.
No comments:
Post a Comment