Free Investment Advice

Never let a profitable options trading position turn around and hit your original stop loss. Once you’re making money, start trailing up your stop and get it to breakeven as soon as you can.

The trend is your friend. Try not to bet against a market or sector. If Retail is tanking, don’t be so eager to catch a falling knife. Some of the best entries can be had when a stock, sector or market moves quickly to a level and then does a small retrace, then retests the level. If it is rallying into this retest level, you add puts, if it is selling off into this retest level, you add calls. Let the market prove itself to you that it has turned around. The majority of stock movement is due to market/sector sentiment, not stock fundamentals. (See sample play below that shows how this works).

If your position has doubled, sell at least half of it and put in a trailing stop for the remaining position.

Emotion is your enemy, logic is your friend. Never day trade on emotion. If you find yourself thinking, “It has to go up!” Get out. Or, “It can’t go down any further!” Get out. The market does not care what you think or hope. It certainly could care less that you want to surprise your spouse with a trip to the Galapagos Islands. It is ruthless and makes its own rules. Past performance is not a guarantee of future results. Just when you think it can’t get any worse, it can get a hell of a lot worse. Don’t be like the guy on the E*Trade commercial who is yelling at his quote screen, then jumps out the window into his front yard. (If you find yourself doing this, it is probably a good time to sell and go for a run). Calm, cool, and collected.

Never buy on impulse from something you just read on a Bloomberg News flash or a CNBC power lunch story, and so forth. If you just heard the news, it is already too late. Plan your buys during non market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy, execute your plan. When in doubt, stay out. Cash flow is king. It is much easier to make 25% every two weeks than to crank out 100% returns on all of your plays. Take a steady profit over and over and over.

Never try to make up all your losses on the next trade. When you are in this mindset, all rationality goes out the window and you will find yourself doing very stupid things like buying 500 options for 10 cents. You are trying to preserver your capital, not “get even” with some nebulous entity known as “the market.”
#

Okay, you’ve found a stock at a support level and you want to buy some call options and options trade. Which ones do you buy? Do you buy at the money? Out of the money? Deep in the money? For our style of trading, we like to look at 1 to 2 strike prices in the money. For example, if we are looking at puts on KSS (Kohls) and it is at $62.00, we will mostly likely buy the 65 puts. This offers a combination of your best leverage with minimal premium decay, which leads us to our next tip.
#

Be careful which series you purchase. In the above KSS example, let’s say that it is September 15. The September option trading series will expire in a week (the third Friday of every month). Do you buy the September series or go the next month out and buy October? In this instance we would go out the next month and buy October. With short term options trading, you generally want to stick to the near month option series until you get about two weeks from expiration. At this point it is a good idea to start looking out at the next month. If you are wrong on an option that expires in two days, the premium will disappear faster than you can type in your panic sell order.
#

Successful traders take time off from trading. Take a week off every quarter and regain your objectivity.