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Published: October 14, 2009
At first glance, it may seem like speculating
with options is a risky business. After all, price swings of
+30% in an hour are far from comfortable for most investors. But
with risk comes reward -- and when you can manage that risk
successfully, the rewards far outweigh the risks over time.
That’s where these six trading secrets come in…
They’re the tools I’ve turned to for decades to maximize my
gains as an options investor while keeping my risks tolerable.
My Options Hotline readers have used these rules to
maximize their options gains over the years too, and now, I’m
passing them on to you...
Speculators get a bad rap. The very word conjures up pictures of
some carefree playboy throwing money into any crazy investment
-- not really caring if they win or lose.
It’s not a flattering picture. And that’s why conservative
investors shy away from anything “speculative” -- lest they be
called speculators, too.
Well, I’m here to tell you “speculating” isn’t a dirty word. You
can be a conservative investor and still enjoy that chance at
phenomenal profits that speculating can bring.
I learned that lesson from my father, Paul Sarnoff. He was one
of the first people to offer an options course -- introducing
novice investors to the concept of Superleverage. But he also
had a strong conservative streak. In fact, he was an avid fan of
precious metals, advocating that they should be at the core of
every solid investment portfolio. He even wrote books on gold
and silver investing.
My father proved that even
cautious investors can benefit from
speculating. But as he always
stressed -- and as I still stress
today -- the key to being successful
was to have a complete plan of
action. You never, ever throw your
money around casually... even if it
is money you can afford to lose. And
you must take steps to make sure you
never get in over your head.
Of course, that’s easier said than
done. That’s why my father developed
six simple strategies for keeping a
level head when speculating. They
may sound common sense, but I’ve
spent enough time in the markets to
know that common sense isn’t that
common when money is involved.
So, if you’re thinking of dipping
your toe into the speculative
markets, here are a few proven ideas
to keep in mind:
1. Create a sound
money-management strategy.
This one flies in the face of the
conventional image of a speculator.
But believe me, all consistently
successful speculators start with a
plan. It doesn’t have to be anything
too involved -- just make sure
you’re clear on your objectives, and
set some guidelines for yourself.
Figure out your entry and exit
strategy for each play, starting
with how much to invest, how many
open positions you plan to have, how
you will monitor positions, what
kind of stop-losses you will use to
preserve capital, etc.
A sound money management strategy is
the most important factor in
successful speculation and it allows
you to stay in the game.
2. Know your broker and monitor
your investment.
When choosing a broker make sure to
ask as many questions as necessary
and that you get the appropriate
answers before simply giving over
your money. If you are a beginner,
find out about the broker’s history
and references, and speak to them
frequently to establish a
relationship. Make sure that either
you or your broker will be
constantly monitoring your
investment -- today’s markets are
very volatile and with options the
price can shoot up +30% or more in
just a few hours... so it is
necessary that your broker is able
to see the option is performing and
be able to execute an order in a
timely manner, to ensure that your
capital is protected.
With so many discount Internet
brokers out there, it seems like
more and more people aren’t doing
their homework before opening an
account. It’s OK to try and go it
alone... unless you don’t know what
you’re doing. In that case, it’s
well worth the time and money to
explore more experienced
flesh-and-blood brokers.
And if you want a hand in selecting
a broker, make sure you check out
the Penny Sleuth’s Discount Broker
Guide...
3. Stick with your exit strategy
if a trade goes against you.
With a good money-management plan,
there should never be any surprises.
No matter what price your trade is
at, the action you need to take
should be clear.
That doesn’t mean you have to be
inflexible, however. Just because an
option has met your profit target,
you don’t have to automatically
sell. But there has to be a
compelling reason to stick with the
trade -- something more than a
feeling that the trade will continue
climbing above your target price.
(After all, you selected that target
price for a reason.) And always use
a stop-loss or a trailing stop order
to make sure you’re ready for any
reversal that might pop up.
For a losing trade, however, you
need to be a little more harsh.
Options are wasting instruments, and
their value dies a little each day.
Sometimes it’s better to stick to
your strategy and settle for a loss
than it is to wait it out and hope
for a miracle. That’s money you
could be plugging into another play.
4. Always, always, always, ask
questions.
The Internet age is creating a
generation of independent investors.
But some are still too proud to
admit that there are things they
don’t know. In the speculation game,
what you don’t know can hurt you.
If you’ve taken my advice about
finding a good broker, you’ve
already got a ready source of info
to turn to. Dozens of Web sites also
offer complete details on options
trading. So there’s just no excuse
for ignorance any more... and losing
money because of ignorance makes
even less sense.
5. Learn from your mistakes.
Find out what works for you. There
will be losers along the way -- but
just make sure you know what you did
wrong in previous trades (e.g. you
set a stop loss of -15% and were
stopped out too early and the option
rebounded to +56% profits). Take
every trade as a lesson and use it
to improve as you continue trading.
6. Remember that knowledge is power.
You can never know too much... strive
to learn as much as you can about
options and their inner workings,
strategies, fundamentals,
everything... so that you will be
better equipped to profit with
options trading.
As I’ve said in the past, options
trading is more accessible than ever
before. And the profit potential
hasn’t diminished a single cent.
Going out of your way to learn the
myriad of ways they can boost your
bottom line is the easiest way to
discover what works for you.
These are the six strategies that
drove my father to success... and
they’ve led to fantastic wins for my
Options Hotline readers over
the years. Now, hopefully they’ll
help spur your success, too. --
Steve Sarnoff
Editor
Options Hotline Editor's Note: This
article originally appeared in
Penny Sleuth. |
