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Get More Winning Option Trades with This One Little Trick

By Jeff Clark
Thursday, February 5, 2009

Keep your emotions in check.
 
That's good advice for almost anything in life. Whether you're playing poker, arguing with your spouse, or teaching your 16-year-old daughter to drive, keeping control of your emotions is a valuable skill. And it's especially valuable when trading options.
 
Of course, it's easier said than done. It's hard to be unemotional when the difference between a profit and a loss hinges on every tick in a stock. It's especially difficult when the market chops around like it has lately, and when triple-digit gains one day are followed by triple-digit losses the next.
 
The trick is to keep your risks small. Yes, that means keeping your profit potential small as well. But success in the option market doesn't come from making a huge profit on one big trade. It comes from multiple small profits.
 
Similarly, you won't fail as an option trader if you suffer a series of small losses. But one big losing trade can wipe you out.
 
You'll make more profitable trades if you keep your risks small. Let me explain...
 
Imagine you've done all the research. You've read through all the news articles, analyst reports, and financial filings. You've examined hundreds of charts with every technical indicator imaginable. And you've decided buying call options on Company X is a solid, no-brainer trade certain to double your money. In fact, you're so certain of this outcome, you put 100% of your investable funds into the trade.
 
This trade is guaranteed to be a loser. Here's why...
 
Murphy's No. 1 law of option trading promises nearly every position will go the wrong way in the beginning. No one knows why this is, but every trader I know tells the same story. We wait for the perfect opportunity to pull the trigger on a trade. Then as soon as we're in position, it moves the other way. It's just a fact of life when trading options. Nearly every position starts off in the red.
 
It's not a problem if we're trading with small numbers. Everyone can handle a small loss. A move of 10%, 20%, or 30% in the wrong direction on a small option trade isn't going to shake your conviction and it isn't going to bluff you out of a trade before it's had some time to work out.
 
But a loss of 10% on your entire investment account will cause you to rethink the trade. A 20% loss will have you staying up all night. And a 30% move in the wrong direction will cause enough intestinal discomfort to have you jumping ship just before the trade has time to start moving your way.
 
Most people lose money trading options because most people bet too big and then either blow up on the trade or wig out and exit the position too soon.
 
If you want to make money trading options, you need to bet small. You'll keep your emotions under control, you'll increase your winning percentage, and you'll ensure your longevity in the option game.
 
Best regards and good trading,
 
Jeff Clark




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Bank of America hits 19-year low.
 
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Market Watch
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52-Wk
S&P 500 1223.75 +0.1% +10.9%
Oil 37.80 -1.1% +0.8%
Gold 136.50 -1.9% +20.7%
Silver 28.08 -4.9% +57.6%
US-Dollar 79.65 +0.6% +5.2%
Euro 1.33 -0.3% -10.5%
Volatility 17.99 -0.2% -18.6%
Gold Stocks 576.48 -2.5% +25.0%
10-Year Yield 3.16 +7.5% -8.4%

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52-Wk
USA 122.83 +0.1% +10.8%
Canada 30.41 -0.5% +17.1%
Russia 22.00 +0.1% +18.9%
India 38.15 +0.6% +22.5%
Israel 16.92 +1.0% +11.2%
Japan 10.56 -1.2% +6.6%
Singapore 13.66 -0.4% +18.6%
Taiwan 14.87 -0.3% +19.0%
S. Korea 57.35 +0.3% +21.8%
S. Africa 71.15 -1.5% +28.2%
China 43.99 +0.3% -1.5%
Lat.America 52.69 -1.0% +8.5%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 134.90 -2.1% +18.0%
Big Pharma 64.04 +0.1% -2.8%
Internet 72.89 +0.4% +27.4%
Semis 16.25 +0.4% +26.6%
Utilities 30.98 -0.7% +0.2%
Defense 18.55 +0.4% +8.7%
Nanotech 10.16 +0.8% +1.6%
Alt. Energy 10.20 -0.4% -4.6%
Water 18.77 +0.8% +14.5%
Insurance 16.14 +0.4% +19.6%
Biotech 20.65 +0.4% +27.3%
Retail 19.65 +0.3% +27.0%
Software 24.83 +0.7% +24.3%
Big Tech 53.88 +0.1% +22.7%
Construction 13.30 +0.8% +16.2%
Media 13.75 +0.2% +23.7%
Consumer Svcs 67.43 +0.1% +23.1%
Financials 54.95 -0.1% +7.0%
Health Care 63.89 0.0% +1.3%
Industrials 63.79 +0.4% +19.8%
Basic Mat 74.54 -0.1% +27.5%
Real Estate 55.53 +0.3% +24.4%
Transportation 91.65 +0.3% +25.1%
Telecom 22.69 +0.2% +14.6%