Basic Options Trading Tips | Option Trading Tutorial

Here are 5 simple rules to live by when trading options. These option trading tips are by no means exhaustive and certainly shouldn't be expected to be fool-proof. There is never a guarantee of favorable outcomes with any investment. Hopefully these concepts might help you improve your odds.

1. Trading in lot sizes less than $1000 is suicide
   • Transaction costs (both getting into and out of positions) absorb profits rapidly when costs as a percentage of investment capital are high. If you are buying blocks of trades in increments less than $1000, your gains had better be bleepin' huge. I'm just sayin'.
2. Use the VIX as an indicator as to whether to be a buyer or seller
   • If the VIX is trading relatively low (think 19 or lower as a best guess), odds are put and call premiums are low, and odds of a favorable outcome (particularly buying puts) go up considerably given the smaller premiums. If the VIX is trading over 25 or more, the volatility portion of call and put premiums start to make up a larger chunk of the call or put price, making selling calls typically the more attractive position
3. Take profits on stock positions buying and selling covered options
   • Using the info in items 1. and 2., begin using option trades as a source of income or to lock in gains on actual stocks held. No one ever got hurt taking a profit.
4. No when you have it good
   • It takes a lot of discipline to unload profitable positions before targets are met, but so many external factors effect options pricing it's important to get out with a little profit as opposed to reaching expiration out of the money (or worse... see #5).
5. DO NOT get caught holding in the money options at expiration
   • If you get caught holding in the money options at expiration they will be automatically executed and you will have to come up with the cash to pay for them - very likely without the means to do so. This potentially puts you at risk of your trades going into default and your account liquidated and closed. TO BE AVOIDED AT ALL COSTS!

Just thought I'd post a couple of quick links to the content that has moved. It is quite a pain to re-create content - particularly something as precise as an option trading tutorial needs to be. Rather than re-post the content here I'll post some links to the new content locations as your guide.

Glossary of Options Trading Terms
A Long Call Example
A Long Put Example
A Binary Option Trade Example

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Happy trading!