- Follow all the rules!
- Only trade options on stocks that you have qualified through fundamental analysis
- Only trade options on stocks or ETF’s that you are interested in potentially owning and willing to buy today because of the long-term fundamentals
- Sell out-of-the-money Cash-Secured Puts only
- Sell near term expiration (40 days or less to expiration).
- Never trade on margin only against actual cash that you have in your account
- Follow and know well the stocks and/or ETF’s you trade (I prefer to limit these to 20)
- Stocks and ETF’s with any of the following five characteristics will be disqualified from option trading:
- If the price is less than $20 or greater than $70 ($25-60 is preferred)
- If the Stock does not trade options
- If there are less than 100 open interest options available on the specific option month/strike price (500 is preferable)
- If the 3-4 month price trend of the stock/ETF is downward (lower highs, lower lows). Only up and sideways trends qualify.
- A company earnings report is scheduled to be released during the term when you would hold the Puts (i.e.; during the current option month). This does not apply when trading ETF’s.
- Only sell puts on down market days when SP500 is down
- Only sell puts on stocks/ETF’s when all three of the following criterion are met:
- The Williams %R indicator for the stock or ETF is oversold >-60 the higher the better (above -80 is preferred)
- There is a 70% minimum success probability
- There is a 2% or more monthly profit in terms of premium per share vs. strike price (this one's flexible due to volatility and number of days left until expiration day)
- Set or monitor protective stops at 2 to 3 times the price of your option premium
- Remember rule #1
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