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An Options Trader's Philosophy: Part 3


Managing risk is the bottom line.

Editor's Note: This post is the third in a series. Part 1 is here. Part 2 is here.

The Importance of Strategy

My area of expertise is speaking to option rookies and helping them get started by developing winning habits. Too many beginners adopt strategies suited for speculators, not investors, and as a result, lose money before they take the time to learn about options. They're out of the game before they have a chance to understand how options work. That's avoidable.

The Rookie's Guide to Options
contains my philosophy on option trading, based on more than 30 years experience. There are many concepts about trading options that are easily shared. For example, you can be shown how to think about the process of choosing strike prices for a specific strategy. When each of the many alternatives is discussed, and the pros and cons of each is described, you can develop a sense of what goes into the decision. It still takes practice, but at least the rookie starts with a good idea of how to make a decision and there's little chance the choice will be made randomly. That's how beginners can learn from the experience of others.

But other ideas are far more subtle and are not only difficult to explain, but you may find certain ideas to be unrealistic, or at least contrary what is perceived to be "common knowledge." These concepts require discussion so you can consider my rationale and then make a reasonable decision as to its viability. These concepts are absent from most educational offerings.

A Subtle Concept

Here's the bottom line: Although selecting one or two options strategies is important because you must feel comfortable trading and have confidence that your strategy can produce profits, your long-term results are going to rely more upon your ability to manage risk than upon which strategy you use.

Opinions such as these aren't typically offered by option educators. Many traders don't recognize the importance of risk management until it's too late. By the time they understand that preventing losses is the name of the game, their trading account has been wiped out.

Options were designed to reduce risk. It's unfortunate that far too many rookies begin using options as tools for speculating in the stock market. And it's not only beginners. There's something appealing about using options as a mini-lottery ticket that escapes me. The odds of success are against the investor, but an occasional win keeps them playing. Just like the lure of a slot machine. Lose a lot, win some back, and continue -- until broke. Option trading shouldn't be done that way.
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No positions in stocks mentioned.

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