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The Four Rules Every Options Trader Should Know


Risk management is the key to success.


Time to get on my soapbox again.

Since the year 2000, I've turned my attention to educating individual investors about the benefits of using option strategies as part of their trading arsenals.

I don't tout expensive seminars, nor is my purpose to promise that trading options will produce instant wealth. The infomercials you see on TV or the full-page newspapers ads you read promise much. But common sense tells you they cannot deliver as promised.
My philosophy on adopting option strategies is that it's worthwhile because it provides 2 essential benefits when investing:

  • Reduced risk. In real world terminology, that means if unforeseen events occur (such as the year 2008 or the bursting of the technology bubble a few years earlier), your portfolio is protected against significant losses. You can use options as an insurance policy in which you establish your own "deductible."

  • Fewer and smaller losses. As a corollary, you will have more winning trades, but the gains aren't unlimited.
Why doesn't everyone use options? Because there's a downside. If you adopt the strategies that I recommend, then it's true that losses are limited. But in return, profits are also limited.

Here's the key: Profits aren't minimal, and you can earn excellent, but limited, returns. Some investors have the dream of finding stocks that double (quickly) and then double again and again. Most of us realize that those days are over, but if that's your dream - if you're seeking a huge profit when investing, then the basic option strategies that I love (and use for my personal trading) aren't for you. You can use options to gamble, but I prefer to discourage that. If that's your goal, learn about using options from someone who touts those gambling, high-risk methods.

The basis for my website, blog and latest book, The Rookie's Guide to Options, is to educate investors on how to use options conservatively -- and that means to reduce risk and increase the probability of earning money -- when compared with buy-and-hold investing.

If you already bought into the hype of those infomercials, this post may not be exciting enough for you because there are no get-rich-quick schemes. I offer education. I'll teach you to understand how options work and how to make intelligent trading decisions when using options. I'll carefully explain how to monitor the position and how to manage risk. I believe in detailed explanations so that you understand and can learn how options work for you. You don't want to be dependent on someone else to make specific investment decisions or recommendations, do you?

I believe that risk management is the key to success. If you make your primary investing goal the elimination of large losses, then your chances of success are excellent. The steady profits, coupled with small losses, will provide for your financial success. But disasters must be avoided.

I have 4 rules for investors, and it's important to use them in this sequence:

1. Don't go broke. Protect your assets.

2. Next: Make money;

3. Then: Build wealth;

4. Always: Never forget the first rule.
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No positions in stocks mentioned.

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