Options Trading Rules

 

Our goal is to construct and maintain an options portfolio that:

• Suits our tolerance for risk and fits within our comfort zone.
• Has sufficient profit potential for the position or trade to be worthwhile.

Preferred strategies – to sell cash secured puts for stock you want to own at low extremes, and use covered calls for stocks that are trading above their intrinsic value.

Risk Management:

• Maximum loss allowed per trade: 2% assuming a $200,000 portfolio for Options Trades – risk no more than $4,000.00.  Calculate the stop loss level equal to this amount prior to making the trade.
• Sell if you hit your predetermined stop loss level.
• Maximum portfolio loss per month: 6% if you do – close out all your trades in the portfolio – reassess your strategies – start fresh the next month.
• Stay in cash if conditions are not favorable for any trade.
• DO NOT SELL OPTIONS ON HIGH MOMENTUM STOCKS or COMMODITIES – This is like giving a heavy drug addict a life insurance policy.  It is a sure recipe for disaster.

Balance your portfolio:

1. Do not put all your positions in on the same day, or for the same time period.
2. Balance short market positions with long market positions.
3. No more than 20% in any one industry sector.
4. Try to keep all your positions at the same relative risk $$ size.
5. Use Beta to further diversify your option portfolio.
6. Stress test your portfolio – against a 10%, 25%, and 50% market move.

Although the risk of .05 to .10 options becoming worth anything is slight, the risk of these options is huge, thus:

1. Never Short options worth .10 or less
2. If you are Short options that become worth less than .10 – close them out.
3. An Option Trader that sells premium should always be net long these units for insurance.
4. Remember – if you use TOS, you can buy back a short options position for no commissions or contract fees if the price of the option is a nickel or less.

To be a successful Trader, you need a logical trading and money management plan you believe in – see Preferred Option Strategies and Trades.