Enhance Option strategy to protect capital

SL

Met a friend at an Option seminar organised by TDAmeritade, he was sharing of his naked put and covered-call strategy (P-C-P strategy).

Personally, I think the US market is overvalue and there is a need to protect one’s capital by using defined risk option strategies.

Realize that not many like to do the adjustment as it is tricky and the probability of successful adjustment can be 50-50. So use defined-risk option strategies is good enough in my opinion.

For friends still doing selling naked put option, do consider using defined risk or/and adjustment to protect your capital.

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Manage Your Risk

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In Chapter 3 of this book titled “The Secret of Option Trading” is MANAGE YOUR RISK.

He gave the simple guidelines:

  1. Use Stop LossI have a bad habit of not putting my stop loss order, I need to improve in that area.
  2. The 200% rule – use 3 times of premium collected to exit a bad trade, I can stomach heavier losses.
  3. Adjusting the PositionThis is my key focus now; practice, practice and more practice. 
  4. Money ManagementI trade small but trade frequent but also need to follow this closely.

MANAGE YOUR RISK (Kerry Given) and MANAGE YOUR WINNER (Tom Sosnoff) both are different in option trading and it is good to understand both side of the camp on where they are coming from. Personally, I think both are right, their reasoning is valid but most importantly is how do I integrate them in my option play.