Nine Principles For Successful Options Trading  

This week I'm going to give you nine critical principles - guidelines if you like -- I use in my own trading.

As you may know I've been trading since 1973 and these nine principles have helped me more than you can imagine...

You see to be a really successful options trader you need to know the "nuances" of trading.

My nine principles are not hard but it's like anything else - the devil is in the details.

Before I get to my nine principles, I'd like to point out my winning trades this week - I'm proud of them and I suspect my subscribers are smiling as well. I would also like to take this opportunity to spotlight a technique that I often use in combination with my nine principles.

First and foremost my recommendations are about hitting home runs (making the really big profits in just a few days) and there is one technique that I use frequently: buying extremely cheap options. Some call this technique "bottom fishing."

The following profits were all earned using this technique...

• I closed the Hecla Mining short-term Power Option for a 76% profit and also a Thornburg Mortgage Call debit spread for a 33% profit.
  
  
• Three other Power Options were closed for three-week profits. A Nortel Networks Jun Put was closed for a 63% profit, a Rigel Pharmaceuticals Jun Put was closed for a 40% profit, and a Broadcom My Put was closed for a 29% profit.

Not bad - all the calls and puts were opened and closed in 3 weeks or less.

I was just reviewing my buy prices in my newsletters so far this year. The lowest price was just $58.00 per contract; highest was $270.00.

That's cheap.

Obviously that means you can control 100 shares of stock for as little as $58. I don't know about in your neck of the woods but my last parking ticket cost more than that.

The biggest potential loss on that should have been around $29 - but in fact I "hit a double" - earning 21% in 21 days. Not too shabby. And when there are losses, the key is taking small losses while racking up home runs (and some doubles and triples) on cheap options. Cheap options have the potential for the very biggest of the big gains. It just stands to reason - the smaller the investment, the bigger potential percentage gain.

Now, let's cover the nine principles of option trading that should improve your overall profits.

1. If you are new, be patient. Don't invest everything right away. Decide how much you want to risk in options during the next twelve months and spread your purchases over that time frame.
   
   
2. Diversify. Take at least two or three positions and try to always own both calls and puts. With the recent swings in the market, playing both sides will improve your chances in the long run. Don't forget this.
   
   
3. Minimize your risk. Pay as little as possible for each option and always be ready to cut your losses. Part of my job is to help find the cheap options and then get you out with a profit - FAST!
   
   
4. Plan before you play. If you do not have a game plan that tells you when to take profits and when to cut losses you will have a very difficult time making a profit. I can help lay out a game plan for you with every options play.
   
   
5. Don't be greedy. The downfall of 90% of all options investors is greed. Putting all your money down on a "sure thing" is a certain recipe for disaster. I've been trading since 1973 - there are no sure things; never bet the farm.
   
   
6. Maximize your leverage. Try to buy options that will increase in value by at least 100%. Buying cheap options is the first step in this strategy. I'm always on the prowl for 100% winners - sometimes I take less. But any profit in 3 weeks is a dandy profit in my book.
   
   
7. Buy options on high volatility stocks. You have a limited amount of time to work with. Your best plays are on volatile stocks.
   
   
8. In general, buy out-of-the-money options. These options normally have lower prices, and less risk. I can help you make money and point out the best possible risk reward picture.
   
   
9. Be patient. This is worth repeating. Contrary to common wisdom, buying speculative options is not a game that requires action every day. Successful options buying requires patience and selectivity. It is the only way to win this game.

If you follow these principles, you will increase your chances of making profits in the options game.

Now to the latest market analysis...

My indicators are giving neutral to bearish readings. This week is historically one of the most bullish weeks of the year for stocks so we could see a bounce following last week's sell-off. However, major investors continue to use rallies as chances to sell stocks and lower their exposure, especially in the financial sector. As long as financial stocks remain weak, the overall market will have a hard time sustaining rallies.

The past few months have been very instructive as to the power of stock charts. We've often referred to the bearish moving average crosses that all the major indexes have made. This is the primary sign of a bear market and is the main reason many institutions continue to sell stocks into rallies.

There are also a couple of secondary chart indicators that have been very good at predicting when the selling will begin and when it might end. For example, the rally early last week took the Dow Industrials up to their 50-day moving average. But once the index reached that level, the selling began.

Another, more subtle trend has arisen recently as a support level, and that is the Dow's long-term growth trendline. This trendline proved to be the low in 2003 when the previous bear market came to an end. And it has proven to be a support level over the first few weeks of 2008. The positive aspect of this is that this growth trendline promotes a "higher low" chart pattern, which of course is half of the "higher lows, higher highs" formula that investors need to see before they believe that the bear market has ended.

Currently the Dow is once again perched right at its growth trendline. If that fails as support, 12,000 is the next test. And if that fails... We've stated numerous times that a fall to 11,000 is the likely next stop. Options players should continue to focus on bearish positions and try to buy puts on mini-rallies so you get the best price possible.

Up Market? Down Market? It Makes No Difference to Options Traders... Find out more on how I can help you with a subscription to The Complete Option Report.