Ten Top Tips to Trade Stock Options Successfully - #7

by : Roger Cox

This week is week number seven in this ten week series on stock options trading. Key number seven is to always trade with the trend. Let's discuss that.

As my first mentor, Dr. Stephen Cooper, says ?The trend is your friend?. Generally, when the overall market trend is upwards then trade calls, when the overall market trend is downwards trade puts. Why buck the trend? Keep it simple?

The general market direction is determined by what the institutional investors are doing. Institutional investors are large corporations such as investment banks, mutual funds and insurance companies. These corporations have billions of dollars to invest in stocks and when they invest or devest it moves the market. Small private investors such as us have very little effect on the direction of the market or a particular stock. If these corporations are investing their millions into the overall market or particular stocks then you should follow them. They may not necessarily know what they are doing but they do make the market so if the Dow Jones Industrial Average is down 200 points as a rule don?t buy calls, conversely if it is up 200 points, again as a rule, don?t buy puts.

Of course these are general rules and there are always exceptions. A particular sector or stock may be performing exceptionally well and just because the overall market is going down you may still have good fundamental and technical reasons to be buying calls in that particular sector or stock. Always double check the news sources I mentioned in Key #2, check the fundamentals explained in Key #3 and check the technical reasons for entering a trade covered in Key #4, if all of these factors combined determine a good trade then by all means take into account the overall direction of the market but do not let it stop you making the trade.

When trading it is imperative that you don?t just take any one factor into account when deciding to place a trade, always ensure there are at least two good reasons for entering the trade and make sure there are no reasons not to trade. Remember overtrading is a common mistake if there is not a good reason to trade then just wait until another day, the market is constantly providing good opportunities to make money, have patience and wait for the right one. And remember, the trend is your friend!

Until next week, happy trading.

US Government required disclaimer: Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of the Characteristics and Risks of Standardized Options. Copies of this document may be obtained from your broker, from any exchange on which options are traded or by contacting The Options Clearing Corporation, One North Wacker Dr., Suite 500 Chicago, IL 60606 (1-800-678-4667).