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Options Trading Strategy
The 10 Commandments of an Options Trader


Successful traders create their own set of rules / commandments (options trading strategy) that they always follow. Some possible examples of the kinds of rules a trader may choose to follow are presented below:

  1. Be patient. This is likely the most important commandment. Do not jump into a trade, wait for the right moment, wait for the right price, and wait for a clear signal from your indicators. There is nothing wrong with “staying in cash”. It is far better to wait and stay out of the market than to jump into the wrong trade, enter a trade too early, or overstay in a losing position.
  2. Protect your portfolio. Never put all your money into one trade. Decide how much you are willing to risk per trade. Formulate a money allocation strategy, for instance investing no more only 20% of your options portfolio per trade.
  3. Minimize your risk. Always be ready to cut your losses. Generally, you should sell a losing option position if it drops by 50%. Take your loss and move on.
  4. Plan before you play. It will be more difficult to profit, if you do not have an unambiguous game plan. Before entering a trade, you should know where you will buy an option, take profits, or exit a position if the trade goes against you.
  5. Do not be greedy. Greed is the downfall of 90% of all options traders. Make sure you follow your game plan so that you can avoid this natural tendency. By using limit orders to buy options, you force yourself to wait for the right price.
  6. Do not stay in a position for a long time. Options prices are negatively affected by the time factor. The longer a trader stays in a position, the greater the potential for time decay.
  7. Buy options on high volatility stocks. The best plays are to be found on volatile stocks that move within wide ranges of their base values; however, high volatility is factored into an option's price, making it more expensive than an option on a less volatile underlying.
  8. In general, buy in-the-money options. These tend to have higher prices, however, the react more directly to the movement of the underlying stock (given their higher delta values); they also give you more flexibility in entering and exiting position.
  9. Buy options with 2 - 3 months left before expiration. The closer to expiration, the more an option's price is affected by the eroding time value; this makes a bet on short-term options more risky. You can compensate for this if you have a strong directional trend working in your favor.
  10. Be patient. This is the most important commandment, and it bears repeating. Contrary to popular belief, buying speculative options is not a game that requires action everyday.

These 10 rules / commandments (options trading strategy) only serve as an example. Every options trader should have his or her own set of rules. Use them to delineate your own unique options trading strategy - one that fits your personal trading style and risk tolerance.

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The Information on the Site is provided for information purposes only. The Information is not intended to be and does not constitute financial advice or any other advice. The trading of stocks, futures, commodities, index futures or any other securities has potential rewards, and it also has potential risks involved. Trading may not be suitable for all users of this Website. Past performance is not necessarily an indication of future performance. You absolutely must make your own decisions before acting on any information obtained from this Website.

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