101Option Trading Secrets Section 8 ppt

Section 8 Trading Tips WWHHEENN YYOOUU AARREE TTRRAADDIINNGG OOPPTTIIOONNSS YYOOUU AARREE AATT WWAARR!! Secret 82 THE TOP SECRET WAR ROOM When I trade, I consider my trading office to be a war room, for when I trade, I am at war with the markets, market makers, the professional traders and the general investing public. In fact, on my desk is a letter opener labeled “Cabinet War Room”, ac- quired when I visited the war room bunkers where Winston Churchill waged war against the Nazis. For when you trade, you are at war, and every ounce of energy should be applied to gain- ing an edge and locating your enemies. One of your enemies is your own emotions. One way to keep them in control is to keep your attack plans top secret. Don’t tell anyone what you are doing, including your wife or husband. As soon as you tell someone about your trades, you put pressure on yourself not to take a loss WHEN YOU SHOULD, for your ego is at stake. One advantage of internet trading is that you don’t have a personal broker to lead you either astray or threaten you with an “I told you so” attitude. Even good personal brokers will put pres- sure on you to perform when the trades are your own idea, even if they say nothing. Nevertheless, a good broker can be invalu- able, especially if you’re just starting to trade. TRADING TIPS 236 [...]... Remember, taking losses in option trading is a virtue, not a sin When you are an option writer with high risks, exiting is your only lifeline, and when things go against you, use that lifeline and get out of that position even if you must take a loss The secret to success when playing poker is to “know when to fold them” The same rule applies to option trading Secret 86 THE SECRET OF SUNK COST As you... in losing a big profit in the future 249 Secret 88 CHECK YOUR TRACK RECORD Not Looking back does not mean not critiquing your past performances As an option trader, your most important learning experience is to review your track record at least once a year Such a review will disclose the mistakes that you made, and we all make mistakes Here, you can alter trading tactics in order to avoid such mistakes... the future Secret 89 THE DRAGON THAT YOU SEE IS NOT THE DRAGON THAT WILL BURN YOU The theme here is be prepared for the unexpected The Twin Towers disaster is the perfect example of the unexpected Here we come back to surprise volatility Such volatility is the friend of the option buyer but the enemy of the option writer After numerous surprise bankruptcies of large corporations TRADING TIPS in 2002,... ignore sunk cost A good poker player never considers how much he has already put in the pot; he considers his chances of winning, not his investment in the pot He knows when to fold his cards 246 Secret 87 ALWAYS USE STOP-LOSSES, AND DON’T LOOK BACK Whether you are buying options or writing options, stoplosses are an important lifeline to your success Stop-losses are exit points where if the option or... results of the system Stop-losses will prevent you from taking major losses and letting big profits slip away Stop-losses would have saved many investors from disaster during the most recent bear market TRADING TIPS Stop losses are a MUST for naked writers and credit spread traders If you don’t use them, you are doomed When entering stop-loss orders, I usually enter a contingency stop-loss, where I exit... and second guess yourself Many times when you are stopped out of a position, you would have fared better if you had not used the stop However, stops are designed to prevent disasters to your portfo- 2 48 A LWAY S U S E S T O P - L O S S E S lio, and the one time you ignore a stop will be the time that does you in Always obey your stop-loss point, especially when it comes to option writing positions If...Secret 85 KNOW WHEN TO FOLD THEM! Being afraid to take a loss is a classic error of the option player, especially option writers and spreaders When your trade goes bad, get out! When you are uncomfortable in... paid previously Unfortunately, too many investors make this mistake of sunk cost by making their decisions based on the price they paid for a stock, futures or options when they should be asking them- TRADING TIPS selves the question, “Would I buy at today’s price?” Don’t be one of those unfortunate investors If you realistically would buy at today’s price, then hang on to the position If not, sell... of the option buyer but the enemy of the option writer After numerous surprise bankruptcies of large corporations TRADING TIPS in 2002, everyone is scared of the market, not knowing who to trust In 1 987 when the Dow gapped down 500 points, a big percentage at the time, many option writers were scared away forever, but the Dow didn’t act like this again for a long time The dragon you think you see coming . Section 8 Trading Tips WWHHEENN YYOOUU AARREE TTRRAADDIINNGG OOPPTTIIOONNSS YYOOUU AARREE AATT WWAARR!! Secret 82 THE TOP SECRET WAR ROOM When I trade, I consider my trading office. invalu- able, especially if you’re just starting to trade. TRADING TIPS 236