Have you ever lost all of your money dealing in stock options?
If you are like the majority of us, you may have previously lost an entire trading account trading stock options. No matter how hard you work, you always seem to lose all your money in the end, even if you initially made a profit. Why is this true?
In reality, trading stock options is risky business! Why is it a dangerous venture? Trading stock options is dangerous because you could lose your entire investment if the underlying stock closes out of the money at expiration. Yes, even equities that appear to be increasing rapidly and steadily could experience sudden and unexpected declines close to expiration, rendering your in-the-money call options completely worthless before you can react. This means that regardless of how confident you are in trading stock options, there is always the potential of suffering a catastrophic loss. Stock options are excellent leverage instruments, but if you dump all of your money into every trade and hope to win the jackpot, stock options trading can eventually wipe out your whole account.
How therefore can we prevent such a dilemma?
Simply by implementing the golden rule when trading stock options! That is to say:
Use Only Funds That You Can Afford to Lose!
Yes, if you can afford to lose no more than 10% of your account at any given time, you should never invest more than 10% of your account in a single stock options trade. This criterion is especially crucial when trading out-of-the-money options, which have a very high probability of expiring worthless.
If you have a $10,000 account and do not want to lose more than $1,000 at a time, you should not invest more than $1,000 on a single stock options trade. Simply stated! The obvious disadvantage of this rule is that you will not make as much money as you would if you placed all of your money on a single trade. However, just as you would never bet all of your money on a single gamble, you should never invest all of your money in a single options trade, regardless of how confident you are! In truth, this applies to all forms of commerce. It requires some self-control to adhere to this guideline, especially if you are “on a roll” and inclined to play a “show hand.” Let me guarantee you that producing less money is never an issue, but losing more money is always a problem!
In fact, when you trade stock options with only money you can afford to lose, you sleep better at night knowing that you cannot lose more money than you have agreed to lose! You will be able to withstand temporary downturns better than those stock options traders who risked their entire portfolio on a single trade. This subsequently increases the likelihood of success, as the majority of stocks eventually recover following minor declines!
Adhere to the golden rule of options trading, “Use Only Money You Can Afford To Lose,” and you will be secure on your path to financial success with stock options trading!