Option Rules

Here are my top 13 rules for trading options plus a bonus one that needs a little explaining. These were developed specifically for my straight call/put plays but they can and do apply to most trading situations including stock trading. You can read a discussion about this in one of the forums I belong to - Superior Investor. You can see there that I originally had 12 rules but my “forum friends” reminded me of a couple that were not on my list.

Anyway, here are my quick fast rules to trade by -

1. Trading is not investing - different rules for each!
2. Cut your losses - playing options 30 to 40% loss maximum
3. Let your winners run - trailing stops or a specific TA point such as price breaking through the 7 day moving average for short term plays.
4. Stick to your plan so as to take the emotion out of it - no Fear or Greed.
5. If the market is undecided or you are unsure about it - stay out!
6. The trend is your friend, do not play a put on a uptrending stock or vice versa
7. Do not place a trade before 10AM eastern (amatuer hour)
8. Do not overanalyze - keep it simple otherwise you will suffer analysis paralysis
9. Set up a watchlist and WATCH IT at least once a day
10. Never chase a stock after its move - there will be another trade another time.
11. Never stop learning about the markets and trading so as to perfect your system while maintaining its simplicity.
12. Playing earnings is gambling!
13. Money management is the key to success in trading - no more than 10% of your entire account in any one trade if your account is $10K or greater. No more than 25% if it is less than $10K only because you need to risk more to make more intially.

And the bonus rule -

More on Money Management - Have a plan for your gains. If you have a small account of $10,000 or less the majority of the gains should be used for increasing the size of your account however even if you have a larger account you should always have a set back. An amount in which your gains are not touched for trading. For example how I do my options account - The account value fluctuates but it is around $10K. If the account goes below this then the majority of my gain goes back into maintaining the account value, basically covering my losses. However when I am above $10K All my gains are taken out and put into another account for investment purposes.

How I do this. Lets say my account is around $9,000 then 80% of my gains on winning trades will go to increase my account value till I reach $10,000. The other 20% is taken out and goes into the investment account. Now lets say my account is around $10,500 then 100% of my gains from my winning trades will go into my investment account. SO then if I have a bad streak and loss $2,000, I still have all my gains from previous trades locked up in a separate account, then I just start over back to the 80% towards recovering losses. I will still use my trading to increase my investment account it just will not be as fast as if I was over $10K. When my stock/Mutual fund/ETF account reaches $250,000 then I can start thinking about moving my options account to the next higher level of $25,000 instead of $10,000. Because I do not want to have my trading account any larger than 10% of my entire stock investment portfolio. Another good rule to live by!

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