Always allocating a predetermined and fixed amount (principal) of your trading capital to options trading is a key strategy to protect your profits. There is no trading system in the world that can guarantee a 100% success rate. Sooner or later, you will likely experience a negative trade, i.e., a trade where you lose all the money you invested.
Following a winning options trade, reinvest only the original trade principal, never the principal plus the profit! For instance, if your trade allocation for options is $1000 and a previous trade provided you with a $500 profit, we strongly advise against reinvesting the full $1500 into your next options trade. Rather, we suggest applying only the original $1000. In this way, should you have a (total) loss due to an option expiring worthless, you would still have the $500, your profit from the previous trade.
Periodically, particularly tempting market situations can arise, which may entice you to commit more of your trading capital to options than originally allocated. A few such situations that might persuade you to abandon discipline are:
- your indicators show an extremely strong market;
- you have just had 5 successful trades in a row and are highly confident that the next one next one will be yet another winner;
- the price of the option you are considering is very low;
- you are considering buying additional contracts for the purpose of averaging down on an already established position.
Don’t be tempted to break the rules under these or similar circumstances! Never exceed the predetermined amount you allocated to options trading.
Here’s one tip to help you succeed: immediately transfer any profits from your options trades to another account, where you will not be tempted to reinvest them into your next trade.