Options and their rules
Print Article Text size Many people think the options market is a place where anyone can easily turn a small stake into a king's ransom. The reality is that many, perhaps most, people actually lose money, due to self-inflicted injuries.
No one has ever substantiated the statement, and it's probably an exaggeration, but it's worth keeping in mind as a slew of new investors hops on board, eager to options and their rules puts and calls to better navigate the stock market. Now is a good time to revisit some timeless trading rules, as the recent launch of mini-options is likely to tempt a new group of investors to test their skills in the put and call market.
Mini-options, which launched March 18, represent 10 shares of stock. Standard options contracts represent shares.
Mini-options are designed to let investors take a seat at the options trading table with less money down. Some argue that anyone who cannot afford standard options contracts that cost a few hundred to a few thousand dollars should not trade options. But that became a moot point once the Securities and Exchange Commission options and their rules the product.
Rules - nasdaq-options-1
It is important that these new traders — and even those with more experience — grasp the little understood realities of the options market. Successful options traders are incredibly disciplined. Good investors think of ways to not lose money. In short, most people think they are long-term investors, but they act like very bad traders.
We have come up with some trading rules to help investors better navigate the trading markets. If you double your money, sell and take profits. Don't be greedy. A quick way to determine profit potentials is determining how a changing stock price influences options prices.
The math is simple. All you have done is subtract the strike price 23 from the stock price.
The 5 Rules of Options Trading
Another good trick is the Rule of 16, which sounds more complicated than it is. Divide a put's or call's implied volatility by 16 to determine how likely a stock is to move, up or down, until the expiration date of the option.
Options and their rules is the square root of the number of trading days in a year. The Rule of 16 is not high finance, but traders spend all day dividing volatilities by 16 to size up the expectations baked into stock and option prices.
If you do not take profits, sell half your position. If you bought 10 calls, and you options and their rules sitting on a bankroll because the underlying stock price has surged through the strike price, sell five calls and take a profit. Condition yourself to always play with house money and to always protect your own. You are up against options market makers whose preternatural trading acumen is sustained by undisciplined, greedy, dumb investors.
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Don't be one of them. Remember this: It is easier to charm the fangs off a rattlesnake than to regularly outfox market makers. Time is your enemy. Options are wasting assets.
Options Trading Golden Rule #1: Small Positions [Episode 469]
They lose a little bit of value each day. The phenomenon is called time decay, and it is why many investors prefer to sell options against stocks that they own or want to buy.
Some people will sit on a position even with a loss. Losses bother people and they cannot think straight. Do not fall in love with positions.
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If you cannot bring yourself to take profits on a winner, at least initiate a spread strategy. You should be asking yourself how much better can it get? Probably not much better.
A spread strategy is a limited loss, limited gain strategy. Master it. Let it roll. If you have to stay in the market, think about selling your position and buying another with a higher or lower strike price. At least this lets you take some money off the table. That's an example of rolling a position. You never want to be sweating a position, hoping it does this or that.
You want to be in control, taking decisive action. That's what trading is about. What do you call a failed trader?
An investor. The reverse is also true, but that's a different column.
The key thought is always thinking about how much money you have at risk. If you lack the discipline to realize profits, you almost certainly sentence yourself to writing Mr.
Market a very expensive tuition check — that's how experienced traders euphemistically describe losses. If you follow these basic rules, and refine them to fit your trading styles, Mr.
Market is more likely to send you checks. It sounds easy, but it is difficult. These rules will help even the odds in your favor.