Rules for Option Trading Success

A number of my readers have been asking me how I trade options. A lot of the questions I’ve received indicate people are looking for firm rules they can use. Frankly, there aren’t many “hard and fast” rules I use. Although I do have three that I’ll share with you.

Keep in mind, following these rules doesn’t guarantee you’ll make any money at all. In fact, you may lose money if you only use these three rules. I share them only so you can get a glimpse of my unique trading style. To make these rules work, they must be combined with an overall trading strategy.

Now that we’ve gotten that out of the way, here are my three “hard and fast” rules…

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.

Instead of a list of things NOT to do, you can think of these from the flip side…

1. Always buy options that have plenty of time before expiration. 2. Only buy options that are already “in the money.” 3. Always sell off your options before expiration.

There you have it: the only three “hard and fast” rules I consistently follow when I trade options. The rest of my trading really depends on the movement of the underlying stock and the particular set-up I’m trading. Unfortunately, there aren’t any blanket rules that fully address the unpredictable forces in 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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