Options Trading 201In Options Trading 201 we will assume you have some good relatively safe option-selling techniques - such as cash-secured put selling and trading in covered calls - under your belt. You are feeling like you’ve made some progress in knowledge and perhaps have made some income. You feel good. What’s next to learn? We need to revisit safety and prudence: We are going to review three time-tested trading adages and apply them to our methods. You may have heard them before: Cut your losers short, let your profits run, and don’t overtrade. For your covered call positions: You will cut your losers short by putting a collar on your covered call or by pre-defining a price on the underlying at which you will exit the position and take a small loss no questions asked. When you write a covered call, your upside is already capped by the written call. To maximize this capped upside, write out-of-the-money calls several months away from expiration. This gives your stock room to move up before it would likely be called away. For your cash-secured put positions: You will cut your losers short by exiting the position in at a predefined loss point. This loss point should be less than the total premium received, so that you will have a positive expectation over a large number of trades. Again, you cannot let your profits run because your max profit is achieved at the time you sell the put. So, your job is to keep as much of it as possible, perhaps following it with a trailing stop, with the intent of letting it expire worthless. For all safe-option traders: Do not overtrade. Know how much capital you have to trade with. Do not use all your capital. Start small. Avoid margin trading. Carefully plan each trade, preplan contingency exits if the trade goes against you, then trade your plan. Enjoy the trade while its on. If it’s moving in your favor there’s really not much you need to do except enjoy the ride.
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