How to improve your trades with options

Many people have written to me in the last two weeks asking, “How do you use options in your trading?” I hope to answer that question in this blog entry.

I use options for almost all of my trades. The only time I don’t use options is when the position I am trading does not have options available, or when there are not deep enough in the money options available for me to trade (more on this later).

Before I get started with the details, I want to be clear that I do NOT use options to increase my position size. Meaning, I don’t buy more of a certain position because I can (because the options are obviously cheaper than the stock). I don’t use the options to get into more of any certain position (leverage). I calculate my position sizes just as I would if I was buying the underlying stock and not the option. I use the options to control risk. I believe that “risk is the currency of the markets.” Therefore, a natural extension of that thought, is that... if I am reducing my risk with options, and I can still get the same reward from the option as I do from the stock, I am getting the same position for less (risk). And, risk=currency. READ MORE...