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10 Options Trading Tips For Conservative Traders

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  • 10 Options Trading Tips For Conservative Traders

    There are many ways to trade options. In fact, there are unlimited ways to trade options due to the unlimited number of options strategies and approaches that can be adopted. This article outlines 10 options trading tips that conservative traders can follow for maximum safety in options trading.

    1. Use only money you can afford to lose

    This is the most common advise given in options trading and one which most people choose to ignore to their own detriment. Using only money you can afford to lose means that if you hope to lose no more than $200 in a single trade, then you should use no more than $200 in buying options at any one time. The good thing about options is that the leverage it offers allows you to make a significant profit even with very small capital outlays and even if you get it wrong, all you can lose is $200, nothing more... if you follow the next tip.

    2. Use only debit strategies

    A lot of options beginners start out options trading using complex credit strategies. There are 2 drawbacks to this approach. Firstly, the complexity of some credit spreads caused beginners who are not used to placing options orders in the first place to enter the wrong orders or leg in the wrong way, resulting in instant losses. Secondly, credit spreads require significant margin which may not allow beginners practicing with a small account to use them in the first place. Using debit strategies allow you to control your losses as well. What you invest is all you can lose, period. You won't lose more than you expect unlike some unlimited loss credit strategies.

    3. Always virtual trade new options strategies

    This tip translates to never using real money for options strategies which you have never used before. Always practice new options strategies on the virtual trading platform offered by your broker. If your broker does not even have features like this, its time to consider changing brokers, which brings us to the next tip.

    4. Choose the right broker

    I would say the right broker should fulfill all of the following criteria; 1, discount commission. 2, offers free real time quotes. 3, offers virtual trading practice platform. 4, offer advanced orders such as contingent orders and trailing stop loss. 5, offers both stock and options trading. Definitely no call in brokers! In options trading, you want to be in control of your own trade and be able to execute them at the click of a mouse without the frustration and delay of calling a broker who may not even understand what you want executed in the first place.

    5. Always buy options or positions with at least 3 months to expiration

    Unless you are a sniper sharp stock picker or using credit strategies which you want expire quickly, always buy options or position with at least 3 months to expiration. There is nothing more frustrating to see your positions expire before the stock starts to move.

    6. Take advantage of low commissions to close out on expiration day

    Most options brokers offer an exceptionally deep discount for closing out options positions on the expiration day of those options. Take advantage of this deep discount to close out positions that are at the money or very near the money instead of risking an accidental automatic exercise.

    7. Use advanced orders to enforce your stop loss

    Most people give in to their emotions when it's time to take a loss thinking that the position might come back the next day. We all know what usually happens after that, yes, the position gets held all the way to expiration and then it expires worthless, losing 100% of its value. Yes, nothing is more difficult than trusting your human emotions to enforce stop loss points. That is why you must always make use of advanced orders such as conditional / contingent orders or trailing stop loss to automate your stop loss policy.

    8. Trade for profit, not for fun

    Most beginners trade options for fun more than profits. Their main aim is merely to use these overly hyped options strategies and see how they work with the aim of making money being secondary. Yes, treating options trading like a hobby and options trading will behave just like a hobby and hobbies cost money. If you don't think a trade has a high chance of turning out successfully, don't make it.

    9. Use put options to hedge your stock holdings

    Perhaps the best use of put options of all time is to buy them as a hedge against your stocks. If you have stocks which you are holding for long term investment purpose, consider buying LEAPS put options expiring six months to a year out as protection against catastrophic drops.

    10. Avoid Out Of The Money Options if you intend to trade with all your money

    The reasons why most beginners lose all their money in options trading in one go is because they buy out of the money options with all their money. This means that they will lose all their money even if the stock moved in their favor but not enough to bring the options in the money! Now, bearing in mind that you should only be using money you can afford to lose, buying only in the money options with those money give you even higher protection and lesser chance of losing everything.

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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

    Good KARMA and positive energy abound.

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