This article wraps up my series about how to trade spread options. I have laid out several rules you should follow, as well as 29 different strategies you could use along with many other factors to consider when trading such options.
The most important things are to keep everything simple and to make sure to protect your portfolio for the long term. Do so even if it means sacrificing a potential profit opportunity in the short run.
Many factors influence the markets and you should not base your trading decisions on predictions that hinge on economic indicators like interest rates, unemployment rates, etc. You might predict correctly and make a considerable profit on one of those predictions, or on several predictions. However, over the long run, it is more likely that you will watch your portfolio dwindle to zero.
Interpret price action and look at the price movement – where the price was, where the price is now and in what direction is the price moving. Once you identify the price trend, look for low-risk points at which to enter and to exit.
I am not saying that you should disregard information of a stock or a market being oversold or overbought. You should take that information into account to plan for any impact it might have on the price of the security you are trading and adjust your stops accordingly.
While I have provided dozens of strategies, rules and recommendations for options spread trading in this series of articles, here are the two most important pieces of advice that I can give you.
Do not overcomplicate things for yourself.
You have probably met someone who thinks and thinks about a problem that you could solve for them in about two seconds. Some people have this maddening ability to take something simple and overcomplicate it to the point of decision paralysis.
This overcomplicating bias is like a virus that infects traders of every level of experience. They will take something simple — a trading method, a setup, an option strategy — mutate it into something that is completely unrecognizable and render it ineffective.
I understand the temptation to take another step, add another data set to your analysis or consider another market indicator to make your prediction more accurate. However, if you start doing that, please stop. Take a deep breath, clear your head and revert to basics.
Simple equals reliable. Reliable equals proven. Proven strategies translate into profits over time.
It is that simple.
Do not lose money.
If you do not have a retirement account, a 401(k), a house, savings, life insurance, or simply a sound financial foundation, then trading, especially options spread trading, might not be for you right now.
That might sound odd coming from me after you invested your time and effort to read as many as 30 of my articles in my series about options spread trading.
Imagine that you are down to your last $2,000, have tens of thousands in credit card debt, are 46 years old with no retirement plan and have a family. Under those circumstances, how stable, mentally and emotionally, do you think you are going to be when trading away at that $2,000? While there is a possibility that you could be a phenomenon with iron discipline and a mindset for success that will not be affected by any of those factors, most people do not have that kind of mindset.
Losing money can become a habit. You are better off not starting that habit in the first place.
If you build your financial house on a firm foundation, you will be more aware of risk because you will know how hard it is to make money and invest it. You will trade with a much better state of mind. Most people, including me, need a measure of stability and security to take on the level of risk that comes with speculation.
Your entire trading account ideally should make up no more than 5% to 10% of your total net worth. Most financial advisors would allocate that share of your net worth just into high-risk/high-reward investments. You will be ahead of the curve if you take control of that portion of your portfolio and trade it yourself.
Therefore, You should not be afraid to take a personal and financial inventory and begin building a foundation. You owe it to yourself and to your family. Just keep in mind that trading is serious work and not gambling. You will not amass wealth overnight. However, if you stay disciplined, use the tools I explained and follow the steps I outlined, you have a good chance of creating a significant investment portfolio and a steady income flow, which will be proportionate to the effort and time you decide to dedicate to trading.
If you are serious about achieving success in trading, I want to wish you the best of luck.
Few things can hold a person back who has the right combination of grit, tenacity, intelligence, discipline and the will to keep going forward.
If there is anything I can do to help you, check out my additional options trading content or contract me through my website: www.stockoptionsystem.com.
Billy Williams is a 25-year veteran trader and author. For a free strategy guide, “Fundamentals for the Aspiring Trader”, and to learn more about profitable trading, go to www.stockoptionsystem.com.