Good day and welcome back, this week I have some excellent
information for you in this, the sixth part of how to trade
stock options successfully. Now that we have covered some
of the more technical aspects of how options work and how
to enter and exit the trade I want to start discussing how
to put it all together. The first part of which is writing
a trading plan.
It is imperative you trade with a plan. No trader has ever
successfully prospered without a trading plan or with a
plan that they didn’t stick to. A sound trading plan
includes, but is not limited to, the following items:
1. Money management rules, i.e. acceptable profits and
losses per trade, how much capital you will commit to any
one trade and to the market at any one time.
It is important you identify what your stop loss margin is
(as discussed last week) and even more important you stick
to it. Writing this sort of information into your trading
plan will help cement it in your mind. We will discuss more
on money management in week eight.
2. Stock and option identification rules, i.e. how you will
decide which stocks to trade options on and which options
you will trade.
Decide if you prefer technical or fundamental analysis or a
mixture of both. How big will your watch list be? What
price range of stocks will you trade? Will you trade in the
money options or out of the money options? What Greeks will
you consider?
3. Entry and exit rules, i.e. how you will decide to enter
and exit a trade, how long you will stay in a trade and how
often you will trade.
Entry and exit rules will depend largely on technical
analysis, write down the patterns and indicators you will
look for. Deciding how often to trade will be a big factor
in your success. Most people over trade, if you have a
fixed profit target then once you have met it you should
stop trading. Attempting to go for that little bit extra
can lead to a big loss, all the more difficult to take if
you had already met your profit target!
4. Your own strategy rules, i.e. which trading strategies
you will use primarily and which strategies suit your risk
profile.
“Know thyself” as the ancient Greek saying goes
is critical when formulating a stock options trading plan.
You will tend to trade options and you do anything else in
life, for example, if you are cautious by nature you will
trade cautiously, if you are impatient in everyday life you
will trade impatiently. Therefore consider your unique
traits and formulate your plan around them.
Once you have practiced trading options you will discover
your own style of trading, and from that you will develop a
plan that suits you. Once you have your plan, and you know
it works, stick to it through thick and thin. That
doesn’t mean that a plan can’t be changed but
you must ensure that you give your plan a chance to work
and that you don’t change it the first time you take
a loss.
Once you formulate and implement a good trading plan you
will be well on your to trading stock options successfully.
Next week we will discuss trading with the overall market
and index options.
US Government required disclaimer: Options involve risk and
are not suitable for all investors. Prior to buying or
selling an option, a person must receive a copy of the
Characteristics and Risks of Standardized Options. Copies
of this document may be obtained from your broker, from any
exchange on which options are traded or by contacting The
Options Clearing Corporation, One North Wacker Dr., Suite
500 Chicago, IL 60606 (1-800-678-4667).
----------------------------------------------------
Roger Cox was born in New Zealand and has lived in Los
Angeles for seven years. He was President of a freight
company at LAX before setting up his own consulting firm.
Roger has successfully traded stock options for over 4
years and teaches other people how to successfully trade at
http://www.prosperitywithoptions.com
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