THE ONE MISTAKE
THAT NOVICE OPTION TRADERS
MAKE THAT CAN DESTROY THEIR TRADING
||by Alan Friedman
There is one major mistake that most option novices make that, if corrected, might be the
difference between making a profit and a loss in their option trading. Many newcomers to
the option market will buy the same number of option contracts with each trade. This a
The proper way to trade is to keep your dollar commitment the same on each trade. Why?
Because if you always buy 10 contracts on each trade, a losing position that costs you
more money to buy will more than offset a winning position in a lower priced option.
Here is an example. Lets say you buy 10 contracts everytime you trade. You enter a
position in the XYZ September 25 calls at $5
10 CALLS XYZ SEPTEMBER 25 @5=$5,000
At the same time, you buy 10 contracts of the QQQ September 40 calls at $1
10 CALLS QQQ SEPTEMBER 40 CALLS @1=$1,000
Now, lets say that XYZ drops sharply and the September 25 calls drop by 50%.
However, the QQQ calls tripled!!! WOW! You made money, didnt you?
Sure, the XYZ calls dropped 50%, but you did score a 200% profit on QQQ. You must be ahead
of the game, right?
10 CALLS XYZ SEPTEMBER 25 BOUGHT AT $5=$5,000
10 CALLS XYZ SEPTEMBER 25 SOLD AT $2 1/2=$2,500
10 CALLS QQQ SEPTEMBER 40 BOUGHT AT $1=$1,000
10 CALLS QQQ SEPTEMBER 40 SOLD AT $3=$3,000
XYZ TRADE: -$2,500
QQQ TRADE: +$2,000
NET RESULTS: -$500
Whoops! Despite having only a 50% loss on 1 trade, and a 200% profit on the other trade,
you ended up with a loss of $500. How can that be? The answer is, because your dollar
committment was greater in the losing trade, you ended up a loser.
How can that be corrected? Easy. Invest the same dollar amount on each trade regardless of
whether you are buying a $1 or $20 option. Now, lets revisit our example using this
Instead of buying 10 contracts on each trade, lets divide the trading capital of
$6,000 that we used in the example, and invest $3,000 in each trade!
10 CALLS XYZ SEPTEMBER 25 @3=$3,000
30 CALLS QQQ SEPTEMBER 40 @1=$3,000
Now, if the XYZ calls drop 50% and the QQQ calls triple, the results will be like this:
10 XYZ CALLS BOUGHT AT $3, SOLD AT $1 1/2=
LOSS OF $1,500
30 QQQ CALLS BOUGHT AT $1, SOLD AT $3=
PROFIT OF $6,000
What a difference! Instead of losing $500, you made a profit of $4,500 EVEN THOUGH THE
OPTIONS HAD THE SAME RESULTS! The only difference was that you used proper money
management rules and risked the same money on each trade!
When you subscribe to The WOLF, you should remember this simple trading philosophy when
you buy our option recommendations. Keep the dollar amount that you invest constant, and
you will see what a big difference this makes in your trading!
THE WOLF put the odds in your favor!