A Sample Option Trading Strategy

When you feel you understand a bit about the Options Trading Market, and are ready to give it a try, you need to spend a bit of time developing a strategy to guide your investment decision. It is important in doing this to understand the basic difference between a strategic decision and a tactical decision.

Your trading strategy is your overall plan. It is the guide. The tactical decisions are the day by day, or even trade by trade method you use to execute your overall strategy. Do not make your strategy overly restrictive and inflexible. It is also important to not let a small set back turn you from your strategy. When your plan is well thought out, it deserves a fair chance to succeed. It is a good idea to include a time frame in your strategic planning. When the time frame expires, is the time to stop and do a complete evaluation of how well or how poorly your strategy fared.

Let's look at a sample strategy.

The first consideration is the amount of available investment capital that is going to be allocated to my options trading plan. Since options tend to carry risk, it makes sense to restrict this amount to what is called risk capital. In other words, I am going to only use money that I can afford to lose. My rent money is exempt under this approach, and will not be used no matter how great the temptation. The plan will be to restrict my investment in options to no more than 20% of my total investment capital.

Next, I will consider a specific target investment. In this sample, it will be finding options with the lowest possible cost. My main concern will be the low cost of the option contract regardless of the type of underlying involved. It will not matter either if the contract is a call or a put. My idea will be both to spread my investment over a larger number of contracts, and limit my losses in the case of any individual one failing to reach the strike price. The idea will be that with a smaller price, the potential profit will be larger and my leverage will be maximized.

Last of all, I am going to stick with my plan for a period of six months to give it a fair chance, and after this period, I will subject the whole idea to a very complete analysis to determine how well it succeeded, or failed. To prepare for this evaluation, very detailed and accurate records will be kept for all transactions. My online options trading broker will more than likely have most of those records saved for me, but I will make sure that this is so, and supplement them with any that I might think necessary.

The above is just an example of how a personal investment strategy might be devised and structured. It was flexible and it considered risk reduction. It allowed ample time to give it a fair chance to succeed. It did not overly hamper my day to day, or tactical investment decisions. Most important, it was my own. There are plenty of people and plenty of websites available to give you advice. Everyone will have their own idea of what will work and what will not work. Listen to them as much as you want, but in the end find the strategy that works for you.