3 “Simple” Answers Your Next Options Trade Needs

Good options trading is simple to understand, yet extremely hard to do. Especially if your goal is to do it consistently. That’s because good options trading runs counter to our natural human instincts—the reactions and feelings that are hard-coded into our DNA.

To combat these instincts, Market Rebellion recommends focusing on the process. That starts with knowing the answer to three “simple” questions before they place their next trade.

1. Why are you entering the trade?

What is it about the trade that appeals to you? Is it the technicals, the fundamentals, or the order flow, like unusual option activity? It has to be one of those. If not, you may be relying on instincts, which is one of the most dangerous feelings to have.

2. Where are you exiting if you are wrong?

Unless you are brand new to trading, you understand the importance that risk management plays in your success. This is the fundamental question for risk management. How much can you afford to lose on this trade? How much pain are you willing to take?

AJ Monte maintains a 1% rule for his portfolio. That means that no single position will cost him more than 1% of his total portfolio. This way, a string of losers will eat into returns but not impede his ability to make it back over the medium- or long-term.

3. Where are you exiting for profits?

If you know how much you can possibly lose on a trade, you should also know how much you stand to gain. Your exit point can either be a point on the chart or a point in time. In the options world, you are likely looking for high percentage gains on each trade.

So good answers to where you cash in can be a point in time (aka when a catalyst is announced in the case of unusual option activity), a specific return percentage, or when the stock reaches a certain technical level.

After you enter your trade, continue to evaluate these questions. Markets are dynamic. Things change. You may want to exit early for profits or a smaller loss if something doesn’t look right. But by answering these three questions to every trade before you enter it, you are setting yourself up for success.

If you’d like to start getting Unusual Options Activity trade ideas sent directly to your inbox every week, try Unusual Options Activity Essential. Get your first month for just $29.