Option Trading Tips for Professionals Options trading tips are important because options trading depreciates assets and require a little more finesse than stocks trading. Be patient to get in, and know your exits. Here are a few options trading tips to keep in mind when options trading. We follow these guidelines in John's Online Trading Newsletter. Listed below these guidelines is a sample play.

• Don't buy an option just because it is cheap. The only reason to buy an option is because the underlying security looks set up to make a decent move.

• Never play deep out of the money options. These are alluring because they are so cheap, but they are cheap for a reason. It may be exciting to buy 500 options for 10 cents each and lay in bed at night praying for them to go a dollar (taking $5,000 and turning it into $50,000), but it happens almost as frequently as Arnold Schwarzenneger gets the nod for Best Actor at the Oscars. If you are trading for an adrenaline rush, you would be better served jumping out of planes or playing craps with next months rent money.

• Never, ever, ever put in an options trading market buy order before the open. This is like walking onto a car lot and handing the salesperson a blank check. "Just write in whatever amount you think is fair," you tell him. This is called getting whacked. By doing this, you could easily pay a few dollars over the closing bid, and even more if the stock gaps open in the direction of your play. Give the stock a chance to open and for the excitement of the opening bell to cool off.

• It is almost always a bad idea to chase a stock. It is even worse if you want to buy options trading on that stock. This always results in a jacked-up premium and a horrible entry price, and sets you up for a teeth-nashing ride through a retracement in the opposite direction of your play. It is tough to make money options trading if you consistently get bad entry prices. Buy calls into weakness as the premium is eroding. Buy puts into strength for the same

• Never put all your money into one play. Don't bet the farm. You might turn $3,000 into $20,000 by doing this. But it is just like going to Vegas and betting it all on red with each spin of the wheel. Sure, you might win 5 in a row, but it only has to hit black once to wipe you out. We hear so many stories of people who ran an account to zero on one trade. If your goal is to run your account to zero, bet the farm on each and every trade. Otherwise, use allocations on your options trading plays. We generally put 15% of our equity into each option trading play, leaving us room for 6 plays at any one time.

• Try not to hold more than six different positions while options trading. If you are holding too many options, it is easy to lose track of what you own and where it is going.

• It is usually not a good idea to hold a position over an earnings report, though earnings provide great trading opportunities for options trading. Some of the better plays are buying calls a few weeks before earnings and selling them before earnings or released. Or you can buy a straddle or a strangle into earnings (buying both a put and a call), hold through earnings, and take advantage of the volatility to leg out of your positions. Remember, stocks and markets rise on anticipation of news, not the actual news.

• Never place a market order for a thinly traded option. As if by magic, the bid and ask will move up 2 points just after you place your order. Think of it this way. If you were walking down the street and saw a $20 bill, you would probably reached down and pick it up. Market makers do the same thing. Place a limit order near the ask and be patient during options trading.

• The longer you hold an option, the greater the risk. Pick your exit points and get out. If you have puts on GS (Goldman Sachs) with the expectation that it will run fall back to its .618% retracement level at $61.50, you should be closing out your position when it drops to $62.00. Get out a little early when the premium is going your way. If it hits $61.50 then begins to bounce hard, the premium will start to dry up and you'll get out at a worse price anyway. If GS breaks through $61.50, you can always get back into a put on a retracement rally. The old adage really is true: In the markets, bulls make money, bears make money, and pigs get slaughtered.

• It's best not to hold a losing options trading position for more than 3 trading days. If you get into a day trade, and for some reason it is just not moving in your direction after 3 days, just get out and look for the next opportunity. This will depend on your time frame as well. If you are holding LEAPS, 3 days is not a concern. If you are holding an option that will expire in 3 weeks, this is a concern and you will want to take a more active and assertive approach to your trading. The best option trades typically start going in your favor in the first day or two. Hundreds of thousands of options expire worthless every month. Be one of the few who followed this rule and got out at a decent price before it goes worthless.

• Never let a profitable options trading position turn around and hit your original stop loss. Once you're making money, start trailing up your stop and get it to breakeven as soon as you can.

• The trend is your friend. Try not to bet against a market or sector. If Retail is tanking, don't be so eager to catch a falling knife. Some of the best entries can be had when a stock, sector or market moves quickly to a level and then does a small retrace, then retests the level. If it is rallying into this retest level, you add puts, if it is selling off into this retest level, you add calls. Let the market prove itself to you that it has turned around. The majority of stock movement is due to market/sector sentiment, not stock fundamentals. (See sample play below that shows how this works).

• If your position has doubled, sell at least half of it and put in a trailing stop for the remaining position.

• Emotion is your enemy, logic is your friend. Never day trade on emotion. If you find yourself thinking, "It has to go up!" Get out. Or, "It can't go down any further!" Get out. The market does not care what you think or hope. It certainly could care less that you want to surprise your spouse with a trip to the Galapagos Islands. It is ruthless and makes its own rules. Past performance is not a guarantee of future results. Just when you think it can't get any worse, it can get a hell of a lot worse. Don't be like the guy on the E*Trade commercial who is yelling at his quote screen, then jumps out the window into his front yard. (If you find yourself doing this, it is probably a good time to sell and go for a run). Calm, cool, and collected.

• Never buy on impulse from something you just read on a Bloomberg News flash or a CNBC power lunch story, and so forth. If you just heard the news, it is already too late. Plan your buys during non market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy, execute your plan. When in doubt, stay out. Cash flow is king. It is much easier to make 25% every two weeks than to crank out 100% returns on all of your plays. Take a steady profit over and over and over.

• Never try to make up all your losses on the next trade. When you are in this mindset, all rationality goes out the window and you will find yourself doing very stupid things like buying 500 options for 10 cents. You are trying to preserver your capital, not "get even" with some nebulous entity known as "the market."

• Okay, you've found a stock at a support level and you want to buy some call options and options trade. Which ones do you buy? Do you buy at the money? Out of the money? Deep in the money? For our style of trading, we like to look at 1 to 2 strike prices in the money. For example, if we are looking at puts on KSS (Kohls) and it is at $62.00, we will mostly likely buy the 65 puts. This offers a combination of your best leverage with minimal premium decay, which leads us to our next tip.

• Be careful which series you purchase. In the above KSS example, let's say that it is September 15. The September option trading series will expire in a week (the third Friday of every month). Do you buy the September series or go the next month out and buy October? In this instance we would go out the next month and buy October. With short term options trading, you generally want to stick to the near month option series until you get about two weeks from expiration. At this point it is a good idea to start looking out at the next month. If you are wrong on an option that expires in two days, the premium will disappear faster than you can type in your panic sell order.

• Successful traders take time off from trading. Take a week off every quarter and regain your objectivity.