3 options trading rules to live by in 2021
If you’re a beginner trader in the options market in 2021, there are certain options trading rules you must learn to see any kind of success.
Like most things in life, you can’t just jump into something and expect to turn $1 into a king’s ransom… especially on the options market.
The reality is that 90% of investors actually lose money trading options… more so when they don’t follow these three options trading rules.
Options trading rules: 3 parts to success
Now is as good a time as any to remind ourselves of the golden options trading rules. They’re the same ones I live by.
Following these three tips will help you become a much better trader…
Rule No. 1: Most options expire worthless
One of the first options trading rules has been an ongoing debate for years. Hedge fund traders say 90% of options expire worthless. Then you’ll have active traders who say it’s more like 50%-60%. However, in my experience, I’d say around 80% of options expire worthless.
And you’ll often hear about these large funds — premium sellers — that write or sell options to collect that amount of premium. They’re turning nine out of every 10 trades into winners due simply to the fact that a very high percentage of options expire worthless.
Therefore, when you buy options, you need to be precise on where and when to enter and exit.
Rule No. 2: Look for options with high delta
You can increase the probability of making profitable options trades by buying contracts with high delta.
Delta measures the degree to which an option is exposed to shifts in the price of the underlying stock. Let’s say you have an option with a delta of 0.75, and the underlying stock goes up by $1. Theoretically, the value of your option will increase by $0.75. If the option’s delta is 0.30 and the underlying stock goes up by $1, your options value will go up by $0.30.
For instance, let’s say you buy a call option on Apple Inc. (Nasdaq: AAPL) with a $210 strike price, a December expiration date and a delta of 0.75; you pay $10 for the option. Then AAPL rallies from $215 to $216. The value of your call option will go from $10 to $10.75.
Rule No. 3: Remember to buy time
You’re probably wondering why 80% of options expire worthless…
Options have time decay (theta decay) — meaning every day the stock doesn’t move in your direction, the price of the option decreases.
Buying options requires a fast and aggressive move in the right direction — that’s how you make money! And the more time you allow the trade to work, the greater the probability you will capture that rapid and forceful move in the right direction.
If you follow these steps — buying call options with high delta and a generous amount of time, you can avoid becoming part of the group whose options expire worthless most of the time. You’ll have an advantage over the crowd, and your account will thank you.
Leave a comment below to let me know what you think! As always, leave your thoughts in the comments section below and don’t forget to subscribe to my YouTube channel to stay up to date with all things options trading.