Getting started with options trading page 2

 

 

would net $940.02 or 94% on a 100% move.

These various option recommendation services will tell you that discipline is important, but I don't think many people pay attention to that.

If an option moves the wrong way -- not the way you need it to so that you can profit -- then you should have plans to cut your losses at 50%.  50% is the number some of these services advise that you should use as a stop loss point.  I am not sure if they say this because it is very easy to figure out what half of any number is.

My experience has been that very few options recover after a 50% loss. My trading has shown that only once out of every 20 times, or 5% of the time, will the option come back to break even from that big of a drop and of those that make it to break-even only 10% appreciate 50% or better. Less than 40% have a modest appreciation (10%-50%) for a profit, but most slip back to a loss. Again, don't forget the transaction costs. You need to pay to unload the option. I've adjusted the 50% rule to 40% because my experience tells me that those options that go down 40% so that I only have 60% left of what I invested have recovered more times than those that went down 50%.

With all of that being said, rules are made to be broken. Not too long ago, a recommendation arrived by email and I got 10 contracts at $2.00 per contract ($2,000.00 before transaction costs). I did not have an opportunity to place a sell order if the option dropped to $1.20 due to an appointment. By the end of the day when I got back to the office, the contract's asking price was $1.00.  I was confident enough in the underlying stock, that I decided to grab another 20 contracts at $1.00 per and moved my break even to $1.33 per contract, not including transaction costs which are always an important consideration.

To compute break even in this case: 10 contracts at $2.00 and 20 contracts at $1.00 which means $4,000 dollars got me 30 contracts at an average of $1.33.  The next morning the stock was added to some firm's Conviction List and the contract went to $2.35 when the option opened for trading.

A profit being a profit, I placed my order to sell 30 at $2.35 and made about $3,000 in one day. This wasn't the smartest move, but it worked for me that time. continued

 

 

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