Rules to Abide by for Options Trading

Having traded stocks for over a decade, I’ve recently gotten very involved with options. I find these to be a great means of expanding my risk portfolio a little bit, and the rewards of a successful trade are truly a great thing.

If you’re new to the trading world, or even experienced but find yourself struggling, I’d like to give you a few pieces of advice that I think will help you out in your quest to become a great trader. Follow these tips and you’ll be in better shape when it comes to trading options.

The first thing I’d like to talk about is the time decay factor. Options tend to deteriorate in value over time due to the fact that as you’re further out from the expiration date, the likelihood of volatility is higher.

As you get closer to expiration, that time premium gradually shrinks over the weeks and month. Therefore, buying and holding is never really a wise options strategy. You should generally look to make some short term trades whenever you’re buying and selling options.

Many smart traders also like to hedge their risk by doing things like straddles, or buying puts on their calls and the opposite as well.

Try buying a few contracts in the opposite direction. That way if you lose out big time, those contracts will win big.

While it limits your upside marginally relative to what you could have made without this strategy, it gives you the necessary protection from losing the entire amount of your investment. Many options traders are naive in not realizing they can lose it all, and therefore neglect this useful bit of information.

By adhering to these tips, I’m sure of the fact that you’ll be well ahead of the typical novice.

For more articles by this author, read his blog about cheap worldwide travel insurance and single trip holiday insurance.

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