Written by A.J. Brown

How I Trade Stock Options

Four Steps for Trading Stock OptionsWhen I make a trade, I’m not looking to hold a position for a year, six months, or even three months. I want to enter and exit my trade within three to 40 days. I have found that I can often make anywhere from 5% to 150% per trade using my methods.

This is a much different strategy than most traders and investors use. They want to be in a position for at least six months and maybe a few years or longer. They are in it for "the long haul."

There’s nothing wrong with this strategy. In fact, I think it’s quite good for certain types of traders and investors. But, I have found, it simply doesn’t fit my personality. I would rather see consistent high-percentage gains on low-risk, short-term trades.

Here’s how I do it…

There are basically four steps to how I trade options. I’ve listed the four steps below with a short description of what is involved in each step.

1. Create a pick list.

Unlike many traders, I don’t scan hundreds of tickers a day. I don’t have to. That’s because I use proprietary filters that automatically pull up the best candidates that might be ripe for an option trade.

My filter chooses option candidates based on both fundamental and technical factors. And frankly, the fundamentals don’t play much of a role in my trades. That’s because fundamentals rarely impact a stock’s price in the short-term.

There may be a dozen or so stocks on this pick list at any given time. This makes it possible for me to find great option trades in less than 30 minutes a day.

2. Create a hot list.

After I’ve got my pick list, I invest some time doing in-depth analysis. Based on my criteria, I might pull out two or three or four stocks onto what I call my "hot list." These are the stocks I actively watch and am ready to take money out of my account and invest in.

While I’m monitoring my hot list, I’m looking for a set-up, a breakout… some kind of entry point.

3. Watch for an entry signal.

Entry signals I look for may include a gap down or a gap up on higher-than-average volume; an established trend with a small swing away from the trend followed by a big swing back into the trend; a "Short-Term Trend-Following" setup; or a variety of other signals.

Of course, I always look for follow-through to confirm the signal I’m going to enter a trade on. If there is no follow-through (and the price moves opposite of what I expect), I don’t make the trade.

4. Watch for an exit signal.

Assuming I’ve been given a valid entry signal with follow-through, I enter the trade and then plan my exit. And, in fact, my exit strategy is always in place before I ever enter a trade.

Here’s my general rule for my technical exit: "Always exit a trade on the same signal that caused me to enter the trade."

So whatever signal produced my entry should also be my exit. Said another way, I leave through the same door I came in through. This keeps it simple.

Of these four steps I’ve shared with you, I believe Step 4 may be the most important of them all. How you exit a trade (and the discipline you use to make your exits) could make the different between small gains and large gains, small losses and big losses.

Based on my experience, I believe it is absolutely worth spending time to master your exit strategy.

So those are the four basic steps I use to trade stock options. If you’d like to learn my strategies more in-depth, you might want to consider becoming a member of the Trading Trainer community.

(To watch a free 15-minute video of a real trade and my analysis of it, click the link above and scroll down to where it says, "Here Is a Real Example of a Trade We Recently Made.")

Best regards always,

A.J. Brown

Categories: Education / Options / Strategies

6 Responses to “How I Trade Stock Options”

  1. RichE @ 2:12 pm:

    You lost me on step4. Is this your stop loss, profit stop, or both? What do you mean by exiting from the door you came in by? If I enter a trade on high-volume, high-price-increase why would I exit on that criteria?

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  2. Lester Tate @ 5:05 pm:

    I am somewhat formiual with this system. Allow me to take a look.

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  3. Bob @ 4:46 am:

    Hello AJ
    after setting an intial option trade at a major
    dicount brokege online i was told i did not
    qualify to use stops on my trades.I had to use
    trailing stops unless i owned the stock.
    Due to votility of markets i prefer to be a
    dymnamic trader and use my pre set stop.
    Does this online discount brokerage have the
    correct policy in place?
    Thanks
    Bob

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  4. Nicholas @ 5:48 pm:

    Tried to view your short video..

    It wouldn’t start.

    NL

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  5. Larry @ 1:32 am:

    Bob if your broker dosn’t let you put stops on options get a new broker..

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  6. PAUL @ 5:17 pm:

    YOU DID NOT MENTION HOW FAR OUT IN TIME OF YOUR STRIKE PRICE…3,,MONTHS OR MORE..
    AT THE MONEY OR IN THE MONEY CALLS…p

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