10 OPTIONS TRADING RULES AND FUNDAMENTALS

10 Options Trading Rules/Fundamentals:

A set of trading fundamentals must be followed to successfully run an options-based portfolio. Specifically, position sizing, sector diversity, maximizing the number of trade occurrences and risk-defined strategies are some notable areas that traders need to heed for long-term successful options trading not only in small accounts but in accounts of all sizes. 

In order to effectively and successfully run an options-based portfolio over the long-term, the following option trading fundamentals must be exercised in each and every trade. Violating any of these fundamentals will jeopardize this strategy and possibly negate the effectiveness of this approach on a whole. Below are 10 option trading rules for small accounts and accounts of all sizes but specifically small accounts as it pertains to risk-defined strategies when capital is limited.

  1. Spread out expiration dates to avoid expiration density 

  2. Set the probability of success (delta) in your favor (70%, 85%, etc.) to ensure a statistical edge

  3. Manage winning trades by closing the trade and realizing profits early in the option lifecycle

  4. Sell options in high IV Rank environments to extract rich premiums

  5. Sell options on tickers that are liquid in the options market

  6. Maximize the number of trades to allow the expected probabilities to play out

  7. Appropriate position sizing / portfolio allocation to manage risk exposure

  8. Sell options across tickers with ample sector diversity

  9. Keeping an adequate amount of cash on hand (~25% - 40%)

  10. Risk-defined trades (put spreads, call spreads and iron condors)  

 

In addition to the 10 rules outlined above, other general guidelines that are recommended are as follows:

  • Avoid earnings related events 

  • Avoid concurrent option trades on the same underlying ticker (if concurrent trades are placed, ensure adequate time between expiration dates and use different strikes)

  • Avoid strike widths wider than ~$5 (rolling trades becomes more feasible and will allow better opportunities for closing trades)

  • Leverage technical analysis to assist in trade selection such as RSI and Bollinger bands (this can help identify the ideal trade type to select such as iron condors, put spreads and call spreads)

  • Identify companies in the same space that report earnings that may impact your pending option trade (i.e. FDX and UPS / MA and V / FB and TWTR / PYPL and SQ / GS and JPM, etc.)

Noah Kiedrowski 
Founder and Managing Member

Stock Options Dad LLC

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