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Investing in Options

Before you begin investing in options, you must decide how much of your money you can safely put at risk. If you are new to options, we recommend no more than 10% of your portfolio.

Remember:

• With every passing day, your option loses time value
   
• The easiest way to profit from options is to be an options buyer. You simply buy calls if you think the index will rise, or puts, if you think the index will fall.
   
• If the index price rises above the strike price of your call option, or if the index falls below the price of your put option, you win your bet.
   
• If the index does not move the way you thought it would, you could lose the entire premium you paid for your option.

Never wait for an option to expire, always sell it before the expiry date:

Just as important as selecting the right option and paying the right price is knowing how and when to take profits. Most option buyers lose, not because they buy the wrong option, but because they fail to take profits properly.

• When your option begins to show a profit, you must get ready to act.
   
• Get ready to sell your position if the index drops by 5%(if you bought a call option), or if it rises by 5% (if you bought a put option).
   
• If your option is in the money and the index makes a big move in your favor, sell your position and pocket the profit.
   
• Also take profits if your option is in the money, moves past the strike price and enters its last week before expiration.

Cutting your losses is just as important as taking profits.

• The hardest part is convincing yourself to cut your losses.
   
• If you do not cut your losses quickly, you will not last as an options player.
   
• If you own an option that has fallen by 50% or more, sell it and close out your position.

Basically, as an options trader you have to know

• When to buy
   
• When to sell
   
• Your likely profit target
   
• At what predetermined target will you take a loss

Safe Amount to Invest

• Always allocating a predetermined and fixed amount (principal) of your trading capital to options trading is a key strategy to protect your profits. There is no trading system in the world that can guarantee a 100% success rate. Sooner or later, you will likely experience a negative trade, i.e., a trade where you lose all the money you invested.
• Following a winning options trade, reinvest only the original trade principal, never the principal plus the profit! For instance, if your trade allocation for options is $1000 and a previous trade provided you with a $500 profit, we strongly advise against reinvesting the full $1500 into your next options trade. Rather, we suggest applying only the original $1000. In this way, should you have a (total) loss due to an option expiring worthless, you would still have the $500, your profit from the previous trade.
• Periodically, particularly tempting market situations can arise, which may entice you to commit more of your trading capital to options than originally allocated. A few such situations that might persuade you to abandon discipline are:
• • your indicators show an extremely strong market;
  • you have just had 5 successful trades in a row and are highly confident that the next one next one will be yet another winner;
  • the price of the option you are considering is very low;
  • you are considering buying additional contracts for the purpose of averaging down on an already established position.
• Don’t be tempted to break the rules under these or similar circumstances! Never exceed the predetermined amount you allocated to options trading.
• Here’s one tip to help you succeed: immediately transfer any profits from your options trades to another account, where you will not be tempted to reinvest them into your next trade.

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