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Investing in Options

You must decide how much of your money you can safely put at risk, before you begin investing in options. We recommend no more than 10% of your portfolio if you are new to options.

Options trader should remember:

• Your option loses time value, with every passing day
  
• To be an options buyer is the easiest way to profit from options. You simply buy puts if you think the index will fall, or calls, if you think the index will rise
  
• You win your bet, if the index price rises above the strike price of your call option, or if the index falls below the price of your put option
  
• If the index does not move the way you thought it would, you could lose the entire premium you paid for your option.
  
• You could lose the entire premium you paid for your option, if the index not move the way you thought it would

Knowing how and when to take profits, is just as important as selecting the right option and paying the right price. Most options buyers lose because they fail to take profits properly and not because they buy the wrong option.

• You must get ready to act when your option begins to show a profit.
  
• Get ready to sell your position if the index drops by 5%(if you bought a call option), or if it rises by 5% (if you bought a put option).
  
• Sell your position and pocket the profit if your option is in the money and the index makes a big move in your favor.
  
• Also take profits if your option is in the money, moves past the strike price and enters its last week before expiration.

Cutting your losses is just as important as taking profits.

• To cut your losses, is the hardest part in convincing yourself.
  
• You will not last as an options player, if you do not cut your losses quickly.
  
• If you own an option that has fallen by 50% or more, sell it and close out your position.

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