How to Improve Your Trades With Options
Many people have written to me in the last two weeks asking, “How do you use
options in your trading?†I hope to answer that question in this blog entry.
I use options for almost all of my trades. The only time I don’t use options is
when the position I am trading does not have options available, or when there
are not deep enough in the money options available for me to trade (more on this
later).
Before I get started with the details, I want to be clear that I do NOT use
options to increase my position size. Meaning, I don’t buy more of a certain
position because I can (because the options are obviously cheaper than the
stock). I don’t use the options to get into more of any certain position
(leverage). I calculate my position sizes just as I would if I was buying the
underlying stock and not the option. I use the options to control risk. I
believe that “risk is the currency of the markets.†Therefore, a natural
extension of that thought, is that… if I am reducing my risk with options, and
I can still get the same reward from the option as I do from the stock, I am
getting the same position for less (risk). And, risk=currency.
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