Options Trading Basics, Position Sizing, Earnings...My Thoughts
For the most basic understanding of options
One option essentially equals 100 shares. Two options equal 200 shares. If you buy one option at $300, the worst-case scenario, your maximum loss/risk would be what you paid for the option or $300. Two options would be $600. And that’s the equivalent of risking 10% had you invested $6,000 in the stock.
If I have a $25,000 account, I would not trade more than 2-3% or ($625) on any given option trade. Options trading can result in a 100% loss on the contract itself, and the fact is that around 60-70% of all options written are expired worthless.
I am consistent in sizing, meaning if I will trade with $625 - I will stick to that every single time. This is a long game, you might be an unlucky streak like anything in life but you need to survive the bad times, you cannot do this if your not sizing and being consistent.
I heard about these things called Greeks... What are Greeks in options trading?
"Greeks" is used in the options market to understand the different dimensions of risk involved while trading options. These variables are called Greeks because they associated with Greek symbols. Read through this article by Schwab.com for more details on the remaining Option Greeks.
Kumar when do you take profit or losses?
My personal opinion to take profits when you get them, and cut losses quick but systemically, I tend to focus on my 70/50 rule, take profits at 70% and stop-loss at 50%.
Now that does not mean I have not taken profits at 30% or left a trade at break-even. It depends on the market and each equity, but I try to follow those guidelines as close as possible.
Set your own standard but become more consistent and do not become greedy. If your up 300% ... why wait for 350%, take the gains or at least take 1/2 off the table.
Buying options to hold through earnings?
The feeling of winning big on an earnings trade feels great but it does not come often or consistently. I do not recommend overplaying earnings and or buying normal sizes and holding through earnings. Everyone wants to hit the stock/options markets big but trust me you will eventually blow up your entire account and be out of the game entirely. If you want to gamble 🎲, go to the casino instead ... at least they serve you a free drink 🍸
How do you trade earnings?
I tend to focus more on Pre and Post Earning reactions mostly. Essentially I would like to ride the equity up or down before earnings and then close out the majority of my position (almost entirely, hold a small amount for the roller coast), and then buy back in post-earnings.
How do you know what to trade?
There are many things to look for, but I try to find equities that have good option flow, increasing volatility or are trending in the news. Trading options in a stock that has no movement will burn your premiums.
How many trades to get into daily?
I tend to minimize the number of trades I like to take because I want to be patient and wait for the entries or let things fall in place. One of my rules is not to over trade. At times I've taken 2-3 positions which are usually closed out same day or the following day, but no more than opening 3 positions in a single day. I tend to not have more than 5 positions open at any given point. Traders are not investors.
Please note these are only my opinions and everyone has their way of trading. You are responsible for your own trading. Trading is risky and can result in total loss.
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