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Don't Let the Tail Wag the Dog

Please remember that the goal of trading options was to enhance the gains from owning stocks. At the cost of accepting more risk, you could accelerate achieving financial independence. Day trading or options trading is not financial independence. It is just exchanging one job for another. The goals that drive your investing decision have not changed. So, your decision making process should not change either.


Do not allow options strategies to change the underlying basis for your stock owning decisions. So, please keep in mind the following guidelines:


1) Do not buy the stock of a company that you do not believe in just because the current options prices look attractive.


2) The options market does not have as many trades as the stock market. In general, stocks with a market cap below $5 billion will not have actively traded options. Do not let this stop you from buying the stocks of smaller companies if you believe in the long-term prospects of those companies.


3) Options are obligations and they limit your freedom to trade the underlying stock. Very large companies have options that expire every week. Most other companies have options that expire every month. Try to keep as much flexibility as possible by trading in options with the nearest expiration date that you can. Be very wary of options lasting 1 year or more (also called LEAPs).


4) Since you are not yet financially independent, you still have a day job. If you are spending more than an hour a day on stock and options trading, you are probably short changing other areas in your life.


5) Stocks pay dividends to the people who own the shares by the ex-dividend date. If the dividend payment is important to you, make sure any options you buy or sell have an expiration date after the dividend ex-dividend date.


6) There is no free lunch. Stock prices typically drop after the ex-dividend date by an amount similar to the dividend amount. Keep this in mind when evaluating the strike price of any option you are considering that expires shortly after an ex-dividend date.


7) The commissions on trading options are much higher than those for trading stocks. Cost matters. If your commission costs start to equal or exceed your trading gains, you are not succeeding in your options trades and should probably stop trading options.

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