The following example is based on a short term (1 week) Option Trade.
Let’s say you really like AAPL above 195.
The stock crosses 195 and as it’s moving towards 196, you buy the 195 call for $2.
All of a sudden, AAPL goes from looking great to terrible.
The stock drops from 196 to 194 and time is running out on this trade.
Your options are only worth $1.30.
You just lost .70 per contract.
The emotional trader says “I’m in it to win it” and presses on, likely losing the remaining $1.30.
The Long Term Trader recognizes their level (195) has been broken and takes the loss.
A week later, the same trade appears again and you buy AAPL at 195 for $2.
This time AAPL keeps going and you exit at $3.20 for a nice quick profit.
The Emotional Trader lost $2 and made $1.20. They are down .80.
On 10 contracts, they are down $800.
The Long Term Trader lost .70 and made 1.20. They are up .50.
On 10 contracts, they are up $500.
Now imagine this scenario, week after week and month after month.
Of course, sometimes the stock will come back but not enough to make it worthwhile.
Not only is it much more fun to be in the long game , it’s much more rewarding.
Now, if you are saying, “why don’t you just buy the stock and keep it?”
Normally, I’d give you a long answer but just look at what happened to Facebook last week.
It lost $120 Billion in value overnight.
At the same time, a good friend of mine bought 4 puts on the 215 strike in FB going to earnings for under $5. He just made 700% and risked under 2k to do it.
That’s why I’m such a fan of Options.
When you learn to trade options and have the discipline to exit trades, you are on your way to a new source of income.
I can’t wait to hear how far you go!