Buying Options With a Plan

Anytime you trade stocks in the market it is normally a good idea to have a plan, but when you trade options plans are critical.  You do not have the luxury of holding onto the option and hoping it will come back.

Your plan should be simple to follow and answer the following questions.

1.       Target

It is normally a good idea to have some idea of where the stock is heading and how much you can expect to make on your option.  Most people will buy an option and hope that they strike it rich without having any sort of a plan.

They just hope that the option goes up a lot and then they will sell.  Well if you want to be successful you are going to have to define a lot. By defining how much you expect the option to move you can help you avoid staying in too long or getting out too early.

2.       Risk

How much are you willing to risk on your trade before you get out.  You need to consider 2 things here.  First you have to determine how much value you are letting the option lose before you exit it.  Are you going to let the option pull back 50% before you exit?  Or maybe you are risking the entire option contract on your trade.

The second thing you need to think about is how much you are willing to risk.  Maybe you only put 2% of your account into 1 option trade.  Maybe you want to increase it to 5% if you are more aggressive.  It depends on how much risk you are willing to take.

3.       Aggressive

How aggressive do you want to be?  If you buy out of the money options you are looking for a much higher return, but with a much higher risk.  If you buy in the money options you are much more conservative, but your gain might not be as high. 

For more on options visit http://www.stocks-simplified.com/stock_options.html