Rules for Option Trading Success

I get a lot of questions from option traders. Lately, my readers have been asking me about how I trade. What they really want are "black and white" rules they can use. Unfortunately, there aren't many rules like this. I do have three though — and I'll share them with you here.

The rules I share here don't guarantee that you'll make money. In fact, you may lose money if you don't have a solid trading strategy. I share these rules simply to give you some insight into my unique style of option trading.

With that in mind, here are my three rules…

1. Don't hold any near-term option contracts. 2. Don't buy option contracts that are out of the money. 3. Never hold an option until its expiration date.

Instead of a list of things NOT to do, you can think of these from the flip side…

1. Always buy options that have plenty of time before expiration. 2. Only buy options that are already "in the money." 3. Always sell off your options before expiration.

These are the only "hard and fast" rules I follow when trading options. From there, it depends on the underlying stock set-up. And there aren't any black and white rules that address the dynamic forces in the market.

Put another way, I do have additional "rules" I depend on. But they're contingent upon a number of variables and factors that require close scrutiny and analysis.

Perhaps my three option trading rules have given you a new angle to look at trading. After all, much of the popular advice involves trading the news — something I don't advise. News is only one factor you should consider in your trading. You should never base trades on news and news alone.