How to Trade Options"properly"?

There are 101 ways to "trade properly". In fact,even your way is the correct one as long as you are able to profit. There are no right or wrong ways to start with. This article is more for newbies who need a path to guide them. I have no right to say mine is the best way,I'm just saying that after trading for a year, fine tuning my knowledge and filtering off the unnecessary things, I have come to a basic mental template that I am able to understand and execute easily. Oh, did i mention that I made humble returns with my methodology.Well,here goes...

1.Turn off your TV and throw away the financial newspapers.You don't need to listen what the "experts" has to say,not because you're an "arrogant-I know-everything"...It's simply because you react on what the chart tells you. Just because Mr Financial Expert and the newspapers say the market will be ABC because of conditions XYZ doesn't mean you'll profit from their theory. If they say market is bullish but the chart shows bearish sentiment,which side will you be on?

2.Never fight the Market Emotions. I'm not a financial theorist or an economist,but somehow or rather, stocks are correlated to the market sentiment.If you're planning to buy a Call(up),make sure the market is in sync with your stock that you are buying(positive),vice versa.

3.Choose your Option Stocks that has...
(i) high liquidity (avg Vol above 500 000)
(ii)fluctuates to a degree that allows you to earn money fast(but not too volatile)
(iii)make sure the bid-ask spreads are less than 20%(for me 10%)
(iv)oversold or overbought positions,so that you can enter when the momentum starts. I use Bollinger band to compliment this style of entry.

4.Cheap Premiums are Expensive Premiums.
Price Sensitivity (Delta)
It's true that the higher the Delta,the more expensive the premium will be,but
there is no point in choosing the right direction trade if the cheap premiums that you bought has very little Delta,unless, you don't have to pay commissions to your broker.I always make sure that my premiums have a minimum delta of 0.5 so that I can profit even when the stock move a little.

Time Decay(Theta)
Make sure your premiums are at least 60 days old before you sell it, because time decay(theta) will start to "corrode" your premiums at a terrifying speed.I'm exaggerating a bit here,but think about this scenario: Premium A cost $100 and you are profiting $15 a day(lets assume you are right on the direction),but you are losing $8 everyday to time decay because you have 20 days to go before the expiration date.Premium B cost $300 and you are profiting $15 everyday but you are losing $3 everyday because you have 70 days to go before the expiration date. So which would you choose?

Volatility factor(Vega)
I try to not trade Stocks that has unusually high Implied Volatility when you compare with Historical Volatility because if volatility drops for some unknown reason,(you can never anticipate the drop) your premiums will shrink drastically even if the underlying price stays stagnant. But if you must trade stocks with high IV because maybe it's too good to miss out, then get in and get out ASAP because anything can happen when IV is unusually high.


I sincerely apologize if it's too brief but I think that's as far as I can explain.If you really need to understand the fundamentals of Options,Trading,Technical Analysis,etc...I sincerely urge you to pick up a book and find a fellow trader to teach you.
On how to Enter and Exit a trade,maybe I'll write a full article on it some other time.

PS: For the paragraph "Choose your Option Stocks", you can go to FINVIZ.COM to filter out stocks that meet the requirements that you want.

Cheers
Hyzel

"The worst mistake traders make is taking their profits too soon,and their losses too long."

Michael Price