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Trading Primer: SUZ'S RULES FOR DIRECTIONAL OPTIONS

I believe an important exercise in trading is to review closed trades, chartwork and methodology.  It is a valuable exercise because you now have the benefit of knowing the outcome of your original thesis.  This enables you to spot trading errors, revamp your current thesis and tweak your trading methodology.  As a result of this practice I developed my "trading rules" that are shared below. 

I have so many rules about options its not even funny...all designed to protect me from myself. For instance, I don't trade directionally with high flier's in options. No ICE, CME, GOOG etc. I just don't do it. I don't trade anything in options that can hurt me. I don't take position sizes that can mortally wound. I am content with nice singles and doubles as they add up quickly over time. I wouldn't know what to do with me if I couldn't trade, and since I have a smaller portfolio I don't take crazy chances.

                I trade with respect, and with a purpose for my life.


1.  I respect my money by using appropriate position sizes.  Just because you can afford to buy $50K worth of AAPL doesn't mean you can/should buy $50K worth of AAPL options.

2. If the option has a nice pop right off the bat (like overnight) and I get gains of 30-50% I sell my position immediately. I can always get back in.

3.If the option position doubles over time I sell half at the point it doubles and let the rest do its thing.

4.If after paring down my position the option returns to my entry price, I exit.

5. If the trade goes against me from the beginning, I will exit at a pre-determined max cash loss, or at the point that the option loses 50% of its value. WHICHEVER COMES FIRST.

6.If an option gaps down on me and blows past my stop and is down 80% I will hold it and do nothing as generally it will correct a touch so I can get a better exit. Not an even exit, but just a better exit. This happens to us all. Less than 80% on a gap I take my lumps immediately and exit.

7.I do not buy options on an illiquid stock.

8. If an option has not made any directional progress in the first week I own it I exit.

9. If trading an option because the stock is going to a predetermined price, I will exit the option when the stock hits its target.

10. For each $1000 gain in a options position I sell enough of the position to bank that $1000.

Suz

Vintage Suz from the archives of StockMarketMentor.com July 18, 2009