by Ken Trester 08/11/08
Most people enter the options trading game with the idea of buying some short-term options and simply watching them skyrocket to big profits. This is the allure and "pot of gold" at the end of the options rainbow.
But after a few losing trades, reality usually sets in -- and newcomers have to realize that, if they are going to survive long enough to hit it big, they must have a game plan to get there.
Before you begin buying options, you must decide how much of your investment capital you feel comfortable putting at risk. Losing streaks are a fact of the game, so never put all of your capital into buying options.
You should set aside only a small portion with which to speculate -- 10% is an ideal maximum for most investors. I can't stress this enough -- smart portfolio management means being diversified among stocks and options.
Commission costs are also an important consideration when deciding how many option contracts to buy and how frequently you want to trade. You might pay anywhere from a couple of dollars to $20 or so per trade in commissions, depending on the brokerage platform you use, so start with enough capital to be able to buy at least four option contracts per position. That way you'll reduce commission costs per trade, giving you a chance to stay in the game longer and increasing your chance of profit.
Your ability to manage your money will determine whether you succeed as an options trader.
The major risk with buying options is that because they have a predetermined time limit, options are a "wasting asset." Every day that passes costs you, and your option could expire worthless.
Inexpensive options are usually the best plays. They give you the most leverage, the percentage returns are better, and if the market or stock goes against you, you are risking less. More important, you're able to spread your capital over more positions, increasing your odds of winning.
A big advantage of buying options is knowing your risk in advance. You simply pay your money (the premium) and wait to see if the stock does what you think it will -- which is rise if you buy a call option, or fall if you buy a put option.
If the stock price rises above the strike price specified in your call option, you win your bet. And if the stock falls below the price specified in your put option, you also win your bet.
But if the stock does not behave the way you thought it would you lose your bet, as well as the money you paid for your option. Don't be dismayed by this. Even the pros only win their bets about 20% to 30% of the time when they buy cheap options.
Fortunately, we know how to increase your odds of winning. So you have a better chance to profit if you follow our strategies.
Diversify Your Options Universe
Diversity makes the world go 'round, and the same is true of your portfolio.
The less you spend on your options trades, the bigger your profits can be. Today we talk about how to get big payoffs for less money.
Making Consistent Option Returns
Enhance your chances of turning a win into a winning streak with these 'tricks of the trade.'
Leverage Your Options Investments
Learn how to properly wield the power options provide to keep your trading account in-the-black.
Use Trailing Stops to Protect Option Profits
Traditional stop-losses help you cut your losses, but trailing stops help you to keep your profits.
