An Options Trader's Philosophy, Part 1
It's more than just mechanics.
Any investor can buy or sell options. The position can be hedged with stock or other options. You choose a position to own, enter the order (at a limit price), and become the proud owner of that position (only, obviously, if that limit order is filled). Those are the mechanics of trading.
That's merely the first step in the trading process. Many traders spend a great deal of time deciding when is the best time to enter the trade, or the best price to get for the trade. There's nothing wrong with that, especially for very short-term traders. Beginners are more likely to enter a trade randomly, being anxious to own a position they can follow.
But buying the position is merely acting on the decision to place the order. It's also important to manage the trade and exit in a timely manner. Just because it's a trade involving options does not mean that it's a good idea to hold positions until the options expire. Once again, rookies may do that -- simply because holding requires making the fewest decisions. Perhaps this series of posts will convince those rookies that there's much more to trading options than "open a position and forget it."
It's true that day traders, swing traders, and investors with either a short- or long-term outlook, all have different objectives when trading options or any other financial instrument. The idea I want to be get across is that there's far more to trading than deciding on when to initiate the trade. To that end, I'll discuss various aspects of trading and how I view them.
I'm not suggesting that my ideas are "correct" and that any conflicting ideas are "wrong." I'm merely presenting what I believe are sound principles for investors -- especially rookies -- to follow, but I truthfully hope that each of you will question every one of these ideas and consider whether they're appropriate for you and your style of trading.
The purpose of this short series of posts is to provide a clearer understanding of what's involved with option trading, and to help you reach important decisions about how long to hold a position, how much risk to accept, how much profit to seek, and so on. These are my ideas. They're not gospel, and I encourage you to disagree with anything that doesn't feel right. Perhaps you want to discuss the merits of a specific recommendation. Feel free to comment, and I'll reply.
I'll elaborate in future posts, but to get started, here are a few things I believe to be true:
Choosing the right strategy is important. You must understand how the strategy works, the risks of owning the position, and how profits are generated. But far more important than choosing the strategy is your ability to manage the risk of each investment.
When a position has earned a profit, and you have the choice of continuing to hold the position or exiting, that profit is your money. It is not "the house's"money. Treat that money with respect.
Trade within your comfort zone.
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