3 Keys to Options Success

If you want to make money trading options, you must have a game plan.

The "5 Ps" apply here — Proper Planning Prevents Poor Performance.

Most novice options traders either lack a game plan or lack the discipline to follow their plan. As a professional options trader I have identified three keys to success when you speculate with options.

Key # 1 Identify and play only undervalued or no worse than fairly valued positions. The main key to success is to identify mispriced options and pounce on these positions.

If you are an option buyer look for undervalued options. Most option traders are momentum players and follow crowd-driven strategies such as buying options on stocks that are about to split or are in strong uptrends.

But because everyone is doing this the option prices are exorbitant.

Never follow the crowd. These players are no different than gamblers in Las Vegas. Anyone can catch a winning streak, but eventually the take (commissions) and slippage (difference between bid and asked prices) will get you.

The options game is a zero sum game. Half the players win and half lose. The professionals only play the game when they have an edge. Our recommendations help you also get that edge.

Key #2 Have a well defined game plan. Even when you only select undervalued options, without a good game plan you are doomed. This is especially true for option buyers.

When you buy options you have many decisions to make.

When do I take profits?

When do I cut losses?

How long should I stay in the position?

Without a game plan you leave these decisions to your emotions. And your emotions always lead you in the wrong direction.

The more quick decisions you make, the more mistakes you will make. That is why being a successful options buyer is tough.

In any option buying game plan, I decide my profit goal for half my position in advance, and at what stock price I will exit the entire position and keep my profits.

And I usually don’t hold a position during its expiration month unless it has little value.

You may have only one chance to take profits -- a game plan ensures that you do so when you have them. You must have good information to help you formulate a game plan and then follow that plan.

Key # 3 The discipline to follow your game plan. This final key to success separates more players from their money than any other. The pros never disobey their stop losses.

Discipline is critical when you trade options.

Sure, at times you may take profits too early or cut losses too early. But in the long run following your game plan will pay off and may save you from financial Armageddon.