You need an options trading system for options trading success. With a system, you are less likely to fall prey to emotions, which will kill you you in any kind of market investing. But for a system to work, it has to have a focus. And perhaps the most important thing for any market system to be about is risk management.
For risk management in your options trading system, start by knowing the basics of proper execution. For instance, don't enter a trade during off-hours of the market--the unexpected could happen and have you getting an execution price that you didn't want. If you have a hot idea and want to execute it immediately, use a limit order when the market is closed. Furthermore, if you use multiple leg orders like covered calls, always enter them as one trade, to keep down commission costs and increase the odds of your getting a reasonable net price. Another risk management trick for multiple leg orders: think about entering a trade order that's better than the market price--that is, enter between the bid and the ask. You can always re-enter the limit order if you have to. Limit orders which are between the bid and ask prices are a little more likely to get executed in the last 20 minutes or so before the close of the market. Hey, the market makers like going to happy hour, too, and they do get a bit more negotiable as the day is winding down.
Another part of your options trading system which may seem counterintuitive is to use credit spreads instead of naked options. This way you have smaller potential profits, but you also can dramatically reduce your risk of loss. Those "dime profits" can add up quickly if you know what you're doing with credit spread strategies.
However, don't get cocky about using covered calls in your options trading system. Essentially, have a tight strategy with these and have no attachments to the underlying asset that you're betting on.
The next important part of your options trading system must include having intelligently informed expectations. A low risk vs. reward ratio doesn't necessarily make for the best trade; for instance, what if it has a low success ratio, too? On the other hand, you can't spend all of your time going for higher rewards and accepting higher risks. Everything in moderation (well, except money). Of course, this means that your options trading system has to incorporate defined targets. Sure, you miss 100% of the shots you don't take, but it's also true that if you aim at nothing you'll hit it.
Know how to use stop orders, stop-loss orders, and protective puts in your options trading system. Thinking before you make a trade will lead you to use this vitally important loss and cost mitigation tools in many instances. Another trick is knowing how to leverage market volatility. If volatility is high, think about selling ITM calls. You can make a killing on the premiums and credit spreads under these circumstances.
It is not child's play to develop a successful options trading system. One of the very best tools that you can use to aid you in your development is a high-quality options newsletter. Choose one with a solid reputation for being written by successful traders who write about what they actually do, not what they would have done or wish they did.
