Written by A.J. Brown

Three Rules for Option Trading

Three Option Trading RulesI’ve gotten a lot of questions about how I trade options lately. Many of those questions are really roundabout ways of asking if I have any hard and fast rules for trading options. I don’t have many rules that I consider "hard and fast," but I do have three. So I thought I’d share them with you here.

Keep in mind, following these rules doesn’t guarantee you’ll make any money at all. In fact, you may lose money if you only use these three rules. I share them only so you can get a glimpse of my unique trading style. To make these rules work, they must be combined with an overall trading strategy.

With that in mind, here are my three rules…

  1. Don’t hold an option near term.
  2. Don’t buy out-of-the money options.
  3. Don’t hold an option until expiration.

The way these are written, it sounds like a list of what NOT to do. And it is. But these three rules can also be rephrased in a positive way…

  1. Only buy options with plenty of time remaining before expiration.
  2. Only buy options that are deep in the money.
  3. Always trade option contracts before they expire.

These are the only "hard and fast" rules I follow when trading options. From there, it depends on the underlying stock set-up. And there aren’t any black and white rules that address the dynamic forces in the market.

Said another way, there are additional rules that I use. But those rules depend on the stock, the set-up, the timing, and a number of other factors that require closer examination and interpretation.

Perhaps my rules offer a new perspective on how to trade options. After all, many of the experts will tell you to make trades based on the latest news or earnings reports. Personally, I advise against this. Certainly, you want to be aware of the news and what things are happening that affect stocks, but you don’t want to base trades on such transient and unpredictable forces.

Best regards always,

A.J. Brown

P.S. If you find this post of value, would you mind submitting it to Digg, Del.icio.us, or StumbleUpon? Thanks!

Categories: Education / Options / Strategies

11 Responses to “Three Rules for Option Trading”

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  1. Trinity13@Options Strategy @ 2:00 am:

    Thanks for the share. I hope I could try this strategy.

    Are these rules very useful to traders or investors? Do these rules have the risks?

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