It’s all about the timing. Trading options can be exciting but you can’t let emotions get in your way when sticking to a plan. The game is not hard and when I enter trades, I pretty much stick by a few simple rules.

Whenever I place a trade I try to capture a 100% return from my entry price. For example, if I buy 10 options contracts for a $2.00 a contract, my total cost is $2,000. My goal is to double my money to $4,000 and then get out of the trade or scale out gradually. Once the trade is profitable I usually set trailing stops behind the current price and above my entry price. Sometimes you can squeezed out of a trade and not make the profits you want but a profit is a profit.

Also, when I enter a trade, I usually set a 50% stop loss from my entry price. In other words, if I enter the same trade of 10 option contracts at $2.00, then I would close the trade once my capital was down to $1,000.

The market can change some of the perameters of the trading plan but if you can get one 100% winner then you could have two 50% losers and still break even, essentially. Whenever you trade keep a track record of your trades. If you pick 6 out of 10 winners (which is highly possible) and follow the aformentioned guidelines, then it can be easy to grow a “speculative” portfolio.

There were some trades that I profiled last week which did extremely well and Monday I mentioned how to use stops to protect your profits. The casino stocks that rallied last week have traded lower for the majority of this week. Monday I told you to place stops on them and this is precisely why.

Las Vegas Sands (LVS, $8.15, down $3.51) is getting smashed today on concerns that they need to raise more cash. If they are unsuccessful then Las Vegas Sands could be Texas toast. I doubt that will happen but it could.

The point is we found a good entry point, played the rally for a few days, set stops, and got out. We can wait for the same trades again or we can move on to other stocks/ sectors that looked poised to rally or poised to fall lower.

Once you close 50%-75% or even 100% of an original trade which we did after we had massive gains, then the rest is play money to add to your gains and the stops are there to also protect those profits.

Rick Rouse
Rick@OptionsMentoring.com

I received a lot of emails on the JPMorgan Chase (JPM, $49.49, up $0.24) trade yesterday and this morning. First, thanks for writing and keep the emails coming. Many of the questions involved stop losses and targets and where the options I discussed are headed. I’ll go over a few quick reminders and what I look for in trades and we can go from there.

The market just opened and JP is slightly higher. The October 47.50 calls (JPMJW, $4.60, unchanged) could have been bought yesterday at the open for $2.75 and before the market closed they were up around 40%. The biggest thing here is that anytime the market gives up a 40%-50% profit in a day, most of the time it is best to take the quick profits and close the trade. It eliminates the greed and emotion we all can get.

Next is your entry prices and exits. If I buy an option for $2.00 a contract and I buy 10 contracts, I have got $2,000 tied up in a trade. I usually set my stop loss anywhere from 25%-50% below my initial investment. That means once my $2,000 investment starts to lose money and goes down to $1,000, I usually cut my losses. Done, no questions asked, move on to the next trade.

For every option trade, my goal is a 100% return. Now, like I mentioned in earlier notes, if you can get 50% in a day then take the money off the table. When I target 100% returns the trade can take anywhere from one to three weeks. However, sometimes stocks move faster than we expect and why risk the 50% you make in a day for maybe a 100% you might make in two weeks?

It was a tough call for many of you to close the trade on JPMorgan because it looked so strong going into the close. The October calls I mentioned still might double but remember it’s okay to take half the position off the table or even the whole thing when your profits grow that quickly.

Rick Rouse
Rick@OptionsMentoring.com

When you trade options there are many routes you can take but one of my favorite trades to use in a really volatile market are the strangle option trades. The best part of a strangle option trade is that they have unlimited profit with limited risk. The strategy can be used when you believe that an underlying stock will experience significant volatility in the near term.

When you do a strangle trade you buy both a slightly out-of-the-money call and put of the same underlying stock with the same expiration date. For instance, if a stock is at $80 and you think it is going to move 10 points either way, you would buy one call option with a strike price of $85 and a put option with a strike price of $75. Or, if you think the stock is going to move 20 points you could do a $90 call strike and a $70 put strike price.

You can get some pretty big returns with the strangle option strategy when the underlying stock price makes a very strong move either upwards or downwards by the expiration date.

The maximum loss for the strangle option trade is the amount of money you paid for both the call and put option. This is hit when the underlying stock price trades between the strike prices of the options bought from the time you buy them up until the expiration date. At this point, both options expire worthless and you lose your initial cost although you can close the trade early so that it is not a total loss.

It works like this. Suppose ABC’s stock is trading at $50 in September. You could do an option strangle by buying an October 45 put for $100 and an October 55 call for $100. The cost to enter the trade is $200, which is also your maximum possible loss.

If ABC’s stock rallies and is trading at $60 on expiration in October, the 45 put will expire worthless but the 55 call expires in the money and has an intrinsic value of $500. If you subtract the initial cost of $200, your profit comes to $300, or a 150% return.

However, if by expiration in October, ABC’s stock is still trading at $50, both the 45 put and the 55 call will expire worthless and you would suffer a maximum loss if you didn’t close the trade early.

There are other potential outcomes of this trade. It is possible that a stock could move sharply one way and then reverse course and head back the other way making both sides of the trade profitable. We’ve seen this happen with a few stocks I have profiled in the blog. The point is, when the market is trading the way it has been lately, there are other option plays that you can incorporate into your trading arsenal to help offset some of the volatility.

Rick Rouse
Rick@OptionsMentoring.com