Trading Options as part of a diversified portfolio

[AussieTrader]

Whooa Options yikes stay away money drain big losses etc etc.

Sure they can be if like all the other speculative vehicles you don't practice good money management. However I love leverage and options give you leverage with bells on. I invest a small % of my portfolio in options and I am able to make it a decent risk reward scenario, it goes something like this.
1) I only buy as much as I am willing to lose outright. So for example if my total loss tolerance is $500 then I wil buy $500 of whatever the option is. That way if the trade goes completely the wrong way my total loss is imited to $500 MAXIMUM (no slippage, no hanging on to the stock in case it mugt bounce back etc). That said I would most likely sell if the option devalued by 50% anyway. So the risk is the same to me as if a stock I was holding went through support and took out my stop loss.
2) I only have 2 or 3 trades running at a time.
3) I give myself at least a couple months time on the option and buy in the money or at least near the money. Basically try to buy options when no one really wants them and resell them when people can't get enough of them.
4) I sell 50% on a double (unless the chart is so strong it tells me otherwise). Then put a stop on your remaining 50% at or just above your buy point and let it ride. Or if the chart look to be rolling over I sell the lot.
5) I use the underlying instrument (the stock itself) chart to tell me whether I stay in or sell.

Options are not for everyone that is true, but my point here being with sound money mangement they can be 'safe' and potentially lucrative. The real issue is finding the good one to buy
Mike

[andyman]

Well aussietrader,

I can confirm this, and I have also a 10% roundup of options in my portfolio.

Options doing particular gut on stocks with medium term potential. Especially if you clearly located topping or bottoming scenarios. However, for this you need some market experience and a clear feeling for cycles. 

I would add to your tips the advice, to take options only, if you identified clearly a medium trend. They work best at a clear medium trends.

If not, the risk is high that spread and time depreciation (newbees! don't underestimate spread's as there are sometimes up to 20% or more) will eat into your gains.
Often a spike in the underlying stock cannot be used for a option trade (as long the option is not deep at the money) because of liquidity and volatility spread.

By considering this and a little experience and feeling, I agree, Options can be 'relative safe' and potentially lucrative.

andyman     

[Ramsburg]

Hi aussie,

I'm not trading options right now, but a few years ago I used to trade a lot
Thats where I made some of my bigger % gainers... but thats normal with options... hehehe

Your strategy is much like my own when I was trading options.
Really small positions, buying near the money, and the same double-out rule

best regards,