{"id":9105,"date":"2018-03-30T07:30:35","date_gmt":"2018-03-30T11:30:35","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=9105"},"modified":"2018-03-30T07:30:35","modified_gmt":"2018-03-30T11:30:35","slug":"follow-these-three-rules-to-master-option-trading","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/follow-these-three-rules-to-master-option-trading\/","title":{"rendered":"Follow These Three Rules to Master Option Trading"},"content":{"rendered":"

Editor’s note:<\/strong> Even with the markets closed in observance of Good Friday, we still wanted to share some valuable option trading advice to keep in mind during these volatile times.
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\nBelow, Jeff shares the three most important rules to follow if you want to become a successful option trader. Read on… and look forward to using them in next week’s market action.\n<\/p>\n

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When you talk about options, most people think of risk\u2026 Dangerous leverage\u2026 Speculation\u2026 Gambling\u2026<\/p>\n

I guess there is that aspect to it\u2026 if you don\u2019t know what you\u2019re doing.<\/p>\n

See, most people don\u2019t understand options. The reason they were created in the first place is to reduce risk. In fact, the original options were designed to help investors hedge their portfolios against bad moves in the market. Unfortunately, what\u2019s happened over time is what happens to a lot of good ideas on Wall Street\u2026options have morphed into a commission-generating vehicle they sell to folks as a way to get rich quick.<\/p>\n

If you think trading options will help you get rich quick, I\u2019ve got some bad news for you. While using options can make you a lot of money, it\u2019s not going to happen overnight. Trading options is a process. And if you want to be in the options market for any length of time\u2026 you have to do it the \u201cright way.\u201d<\/p>\n

Learning the \u201cright way\u201d to use options might involve a little extra effort on your part if you want to trade in the market successfully. But I can help you master the basics\u2026 I\u2019ve traded options for nearly three decades. During that time, I\u2019ve also been teaching folks just like you how to reduce their risk with options and add a little bit of \u201cpop\u201d to an otherwise conservative portfolio.<\/p>\n

But before you get started, here are a few things you must keep in mind:<\/p>\n

Truth No. 1: Buying and selling options is about the least risky and potentially most rewarding game on Wall Street.<\/strong><\/p>\n

Options master Victor Sperandeo racked up a nominal rate of return of 70.7% without a losing year between 1978 and 1989. With his astounding track record, we\u2019d be foolish not to pay attention to what he has to say:<\/p>\n

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\u201cOptions are, many say, the riskiest game in town. Certainly they are by far the most challenging, flexible, and potentially profitable financial instruments available. But if you trade them prudently, if you apply sound principles of money management, trade only when the risk\/reward ratio is highly in your favor, and execute your trades with diligence and patience, then in all likelihood you will be profitable over the long term. I can say, conservatively, that at least 40 percent of all the returns I\u2019ve made in my life have been with options.\u201d<\/p>\n<\/blockquote>\n

Truth No. 2: Want to be a winner? Watch your losers!<\/strong><\/p>\n

To succeed in trading options, you really need to limit your trading to opportunities that have at least a 3-to-1 payout. A 5-to-1 reward-to-risk ratio, of course, is better. But at minimum, you want to have the potential to pocket $3 in return for every dollar you risk.<\/p>\n

You accomplish many things by forcing a minimum 3-to-1 discipline on yourself. For one, it forces you to think in terms of reward and risk, which is extremely important. Most failed options traders, even ones that may have had good trading systems, fail because they didn\u2019t pay enough attention to risk. If you\u2019re willing to lose 50% on a position, you\u2019d better be expecting a gain of 150% or more \u2013 at least. That\u2019s a tall order.<\/p>\n

If you\u2019re willing to lose it all (meaning have the potential for a negative 100% return on a position), then you\u2019d better be expecting a 300% to 500%-plus gain in that position.<\/p>\n

When you see it in terms of risk versus reward, and you realize that 500% winners don\u2019t come along every day, you can see that \u201crisking it all\u201d is a bad bet.<\/p>\n

Options are a lot like poker. Your hand is only a small portion of the battle. Betting appropriately for the entire game is really what\u2019s important, which leads us to\u2026<\/p>\n

Truth No. 3: Big winners make small bets.<\/strong><\/p>\n

You\u2019ve got to know when to hold \u2018em and when to fold \u2018em. But you\u2019d sure hate to fold \u2018em and take a total loss with a big bet on the table\u2026 So don\u2019t ever put yourself in that boat. Limit the size of your positions. You should only have 2%-3% of the money you\u2019ve set aside for trading at risk on any one trade. We really can\u2019t imagine any combination of circumstances where you should consider putting more than 10% of your trading money on one play. Don\u2019t do it!<\/p>\n

To end up like Vic Sperandeo over the long run, you\u2019ve got to stick to the program. Limit the size of your positions. And limit your downside by never allowing a small loss to turn into a big loss. Traders who follow this have a chance of being winners in options over the long run. Those who don\u2019t do this will be quickly drummed out of the club, taken for every penny.<\/p>\n

Best regards and good trading,<\/p>\n

<\/p>\n

Jeff Clark<\/p>\n

Reader Mailbag<\/strong><\/h2>\n

Today, a few comments about the Market Minute<\/em> and Delta Direct\u2026<\/p>\n

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Hey Jeff, thank you for your great analysis of the markets every day! I have learned an immense amount from you, and continue to do so every single day. I can\u2019t begin to thank you enough. And on a side note, I am getting quite excited and anxious for earnings season and am crossing my fingers that it will generate several profitable trades for your subscribers!<\/p>\n

– Ryan<\/strong><\/p>\n<\/blockquote>\n

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I really like getting your emails. It’s like having a friend (a smart one) in the business.<\/p>\n

– Jim J.<\/strong><\/p>\n<\/blockquote>\n

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When do you sleep? Seems like you’re ALWAYS on.<\/p>\n<\/p>\n

– Chuck <\/strong><\/p>\n<\/blockquote>\n

And a response to an unusually light day of Delta Direct blog activity\u2026<\/p>\n

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Hi Jeff. As always, thanks for everything you do! I was wondering a couple of times throughout the mid-\/late-morning today (like you, I live in the Bay Area) whether: 1. The \u201cchopping around\u201d was boring you to sleep; or 2. \u201cLife\u201d needed you, which it sounds like was the case.<\/p>\n

I am always amazed at how dedicated you are to your subscribers \u2014 even the 20% you\u2019d like to fire<\/a>! You have done an excellent job of helping us learn. So, I have no issues with you dealing with your main priorities (i.e. life, family, health), because you give us enough knowledge to deal with things and be responsible for our own positions! Thanks and best regards.<\/p>\n

– Jim R. <\/strong><\/p>\n<\/blockquote>\n

Do you have any trading experiences from the last week you’d like featured in the Market Minute<\/em>? <\/p>\n

Write to us right here<\/a>… We always like to hear from you.<\/p>\n","protected":false},"excerpt":{"rendered":"

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