Options Trading
Have you ever lost everything in your options trading account?
The fact is, options trading is a risky business! There is always the chance that your options will expire worthless, losing all of your investment. But, at least when you are buying options as opposed to selling, your potential loss is limited - so you can control the amount you might lose.
In what way is it risky business? Stock options trading is risky because you could lose all your money on any stock options trade if the stock eventually closes with the options out of the money during expiration! Yes, even stocks that seem to be rising very quickly and steadily could take sudden and unexpected drops near expiration, taking your in the money call options way out of the money before you can react to the market changes! This means that no matter how confident you are in stock options trading, there is always the possibility of a total loss. Stock options are fantastic leverage instruments but if you simply throw all your money into every trade and hope to strike lucky, then stock options trading will one day wipe out your entire account in one fell swoop.
So, how do we avoid such an outcome?
Simply by applying the number one rule of business! That is:
If you can’t afford to lose it, don’t use it!
Yes, if you could afford to lose only 10% of your account at any one time, you should never use more than 10% of your account on any single stock options trade! This rule is especially important if you are trading out of the money options which have a significant chance of expiring worthless.
For example, if you have a $10000 account and you do not wish to lose more than $1000 at a time, then $1000 should be the maximum amount you use on any single stock options trade. Simple as that! The obvious drawback of this rule is that you will not make as much money as you would have if you had simply punted all your money on a single trade. However, just as you would never bet all your money on a single gamble, you should also never put all your money into a single options trade no matter how confident you are! In fact, this applies to any form of trading as well. It takes a little discipline to stick to this rule especially if you are ‘on a roll’ and tempted to go for the big one. Remember that there is never a problem with making less money but there always is a problem losing more money!
In fact, when you are using only money that you could afford to lose in stock options trading, you can sleep better knowing that you cannot lose more money than you have decided to lose! Your holding power becomes greatly enhanced and you could perhaps ride out temporary downturns better than those stock options traders who punted all their money in one trade. This consequently translates to a higher chance of a win as most stocks eventually come back profitably after temporary pullbacks.
So, stick to the “If you can’t afford to lose it, don’t use it!” rule of options trading and you will be safe in your journey to financial success with stock options trading!
