Some Basic Rules for Options Trading - Part One

1) You Must Pre-Plan ...

     and therefore you need to know your:

• Maximum Risk

• Maximum Reward

• Breakeven Points

• Entry Point

• Exit Point for both taking profits and stopping losses

Always have a stop in mind whenever you make a trade: whether a mental stop, an alert or a stop loss order.

2) Choose Your Strategy - here are some basic examples:

     A) Covered Calls

     B) Buy a Call or Put

     C) Collar

     D) Straddles or Strangles

3) Set Your Filters In Order to Find Stocks to Trade

     A) Look for stocks that are over-extended in either direction and are ready for a retracement           of some sort.

   

          ex: moving or "thrusting" stocks that have moved up or down for more than 10 periods                 (days or weeks) in a row. - use daily first.

     B) Look for the 15% biggest gainers or losers in both the last 30 days and those that have

          continued to move the the most since hitting a 5 day high or low.

     C) Filter for stocks of adequate average daily volume of at least 500,000 shares.

4) Design Your Plan for Entry and Exit Points

     A) Id support and resistance using advanced Fibonacci - www.themarketmatrix.co.uk

     B) You need a method for identifying if a stock is overbought, oversold or temporarily over-               stretched.  An Oscillator Predictor can help with this.

     C) Trading with Dinapoli Levels at fibtrader.com will help in this mattter. 

     D) Oscillators such as MACD or Stochastics = id trading rangebound or at trading point.

     E) Stop losses and profit objectives - trading should be like running a business.  Use your                   support and resistance levels to determine your entry and exit decisions.

     F) Keeping an eye out for key events that might effect your chosen stock or the market as a               whole and ultimately your trade.

     G) Timing indicators - Fibonacci