Option Trading Guidelines

Timeless principles for smarter, safer, and more effective option trading, whether you're a novice or a seasoned pro.

This article originally appeared in the November 26, 1993 issue of The Option Strategist Newsletter, but the trading principles it outlines remain just as relevant today. Whether you're new to options or have decades of experience, these time-tested guidelines provide a solid foundation for disciplined and thoughtful trading. They won’t promise overnight success, but they will help you stay out of trouble, make better decisions, and improve your long-term odds of success in the options market.

---

This article was originally published in the November 26, 1993 issue of The Option Strategist Newsletter.

I was recently asked what guidelines I generally follow in my option trading. This is actually a rather thought-provoking question, especially when it regards something one does almost every day. In our feature articles, many useful general strategies have been given, but not assembled all in one place. After giving the matter some thought, it seemed like it might be beneficial to list some of the "rules" that we follow, either consciously or sub-consciously after all these years. For the novice, they may be eye-opening; for the experienced option trader, they may serve as a reminder. These guidelines are not the path to easy riches, or some such hype, but following these guidelines will generally keep you out of trouble, increase your efficiency of capital, and hopefully improve your chances of making money with options. They are not presented in any particular order.

Trade in accordance with your comfort level and psychological identity.

If you are not comfortable selling naked options, then don't; even though such strategies are nicely profitable for some traders, they should not be used if they cause you sleepless nights. If hedged positions drive you crazy because you know you'll have a losing side as well as a winning side, then perhaps you should trade options more as a speculator — forming opinions and acting on them accordingly. The important thing to realize is that it is much easier to make money if you are "in tune" with your strategies, whatever they may be. No one strategy is right for all traders due to their individual risk and reward characteristics, and accompanying psychological demands.

Always use a model.