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A number of my readers have been asking me how I trade options. A lot of the questions I’ve received indicate people are looking for firm rules they can use. Frankly, there aren’t many “hard and fast” rules I use. Although I do have three that I’ll share with you.

Keep in mind, following these rules doesn’t guarantee you’ll make any money at all. In fact, you may lose money if you only use these three rules. I share them only so you can get a glimpse of my unique trading style. To make these rules work, they must be combined with an overall trading strategy.

With that in mind, here are my three rules…

1. Don’t hold any near-term option contracts. 2. Don’t buy option contracts that are out of the money. 3. Never hold an option until its expiration date.

This is clearly a list of what NOT to do. But this list can be rewritten in the positive sense like this…

1. Only buy options with plenty of time remaining before expiration. 2. Only buy options that are deep in the money. 3. Always trade option contracts before they expire.

There you have it: the only three “hard and fast” rules I consistently follow when I trade options. The rest of my trading really depends on the movement of the underlying stock and the particular set-up I’m trading. Unfortunately, there aren’t any blanket rules that fully address the unpredictable forces in the market.

The truth is, I have a number of additional “rules” to help me trade. But these rules can’t be applied in all situations. They’re more like guidelines. I still have to analyze a number of other factors before I use them.

Perhaps my three option trading rules have given you a new angle to look at trading. After all, much of the popular advice involves trading the news — something I don’t advise. News is only one factor you should consider in your trading. You should never base trades on news and news alone.

Tags: Investing