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If you’re a beginner trader in the options market, there are certain options trading rules you must learn to see any kind of success.
Like most things in life, you can’t just jump into something and expect to turn $1 into a king’s ransom… especially on the options market.
The reality is that 90% of investors actually lose money trading options… more so when they don’t follow these three options trading rules.
Now is as good a time as any to remind ourselves of the golden options trading rules I live by. So I put together a list of traders who want to become profitable must know. .
And by following these three tips, you’ll become a much better trader…
One of the first options trading rules has been an ongoing debate for years. Hedge fund traders say 90% of options expire worthless. Then you’ll have active traders who say it’s more like 50-60%. However, in my experience, I’d say around 80% of options expire worthless.
And you’ll often hear about these large funds — premium sellers — that write or sell options to collect that amount of premium. They’re making nine out of every 10 winners due to the high percentage of options that expire worthless.
Therefore, when you buy options, you need to be precise on where and when to enter and exit.
The next options trading rule is that you can also increase the probability of your trades by buying a high delta option.
Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset. Let’s say that you have a 0.75 Delta and the stock goes up $1.00. The option will go up $0.75.
For instance, let’s say you buy an Apple Inc. (Nasdaqa: AAPL) Dec. $210 call option for $10.00 a contract with a 0.75 Delta. Then AAPL rallies from $215 to $216. The price of your call option will go from $10.00 to $10.75.
You’re probably wondering about the final options trading rule and why 80% of options expire worthless…
Options have time decay or theta decay — meaning every day the stock doesn’t move in your direction, the price of the option decreases.
Buying options requires a fast and aggressive move in the right direction — that’s how you make money! And the more time you allow the option to work, the greater the probability you will have to capture that rapid and forceful move in the right direction.
Now if you follow these steps — buying high delta call options and time, then you won’t be part of that group that has their options expire worthless most of the time. You’ll have an advantage and your account will thank you.
Leave a comment below to let me know what you think about these options trading rules!