Introduction to Option Trading Part Two

Wait for proper timing You should not only wait for proper timing but also keep your expectations within limits. In the game of trading options, there will be a few large gains but, unfortunately, a significant number of losses can also be expected. Since losses are unavoidable, it is essential to keep them as small as possible. Don't buy or sell too early One of the difficulties with buying options is knowing when to enter a position. Buying early at the lowest premium possible is important, but if you buy early the chance of a losing trade is necessarily greater. Skills in selling are also very important. Do not try to sell at the very top. Wait until the top is reached. Set stops and follow your positions with the OptionExpert tracking windows. Do not sell early but only after a reaction to a new high. It is also important to remember not to chase a bad position after the price drops. If you have taken a position and the price decreases beyond your preset limit, let it go. It is never too late to sell. If you are taking losses, take your lumps. Get out when your stops tell you to and don't wait for the position to go even lower and possibly expire worthless. Use fear and greed to your advantage The emotions of fear and greed are well known to any stock or option trader. These emotions are normal and need only be harnessed in the right direction to benefit the trader and increase returns. Your strategy should be to let your profits run and to cut your losses. The emotion of greed should be used when a position is advancing. Greed should generate a hope that the advance will continue, and should be used to keep you from selling the position prematurely. Use greed to strengthen your patience in order to let your profits run, and to wait for your stops to indicate a sell. Consider selling if a reaction to a new high or low fails to result in further gains. The emotion of fear should be used to cut your losses. The fear should be that of losing additional principal. Instead of allowing losses to continue, it's far better to take your losses and save the remaining principal for another day. Always track your positions with with a position tracking tool, and heed any sell signals to help keep your losses small.

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