I get a lot of questions from option traders. Lately, my readers have been asking me about how I trade. What they really want are “black and white” rules they can use. Unfortunately, there aren’t many rules like this. I do have three though — and I’ll share them with you here.

The rules I share here don’t guarantee that you’ll make money. In fact, you may lose money if you don’t have a solid trading strategy. I share these rules simply to give you some insight into my unique style of option trading.

Now that we’ve gotten that out of the way, here are my three “hard and fast” rules…

1. Don’t buy any options that expire in the near term. 2. Don’t buy options that are out of the money. 3. Don’t hold an option contract through its expiration.

Instead of a list of things NOT to do, you can think of these from the flip side…

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.

Put another way, I do have additional “rules” I depend on. But they’re contingent upon a number of variables and factors that require close scrutiny and analysis.

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.

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This entry was posted on Friday, August 15th, 2008 at 7:07 am and is filed under Investing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.