I was a cocky beginning trader. Soon after attending a stock trading seminar, I had several big wins. In my own mind, I was the exception to any and all stock market trading principles. I could do no wrong. My short-lived reign as a trading Adonis came to an abrupt end. All my money began raining down into the pockets of real stock market professionals. Fortunately, I wised up before it was too late.

In short, I was a young punk who knew everything about nothing. I often times had to learn things the hard. Learning to trade in the stock market was no exception. So, here are my top three ways to prevent an STD.

#3 Way To Avoid An STD

Perform thorough market research! Taking proper research for granted is a one-way ticket to Brokeville. Trust me, I know. Due diligence is required in order to side step a poor stock decision. Remember, getting into a bad trade is simple…getting out is costly. Give market research the time and attention it deserves.

#2 Way To Avoid an STD

Remove hope from your emotional make up when trading! Wishful thinking is a dangerous mindset to be in when you are a stock trader. Hope and wishful thinking lead to irrational decisions based on emotions rather than factual information. Going down with the ship is far from an act of nobility. You will make mistakes. As a trader, you must be willing to make corrections quickly. In the stock market, making too many errors, too fast will certainly cause you to be prematurely ousted from the markets if you do not adhere to the method #1.

#1 Way To Avoid an STD

Make use of a protective stop loss! After placing your order, ALWAYS set a protective stop. Failure is not to far off in the distance for a trader who handles the duties of risk management in the absence of a stop loss. A stop loss is not perfect but the only insurance policy a trader has against stock trading career ending losses. Stop being a philanthropic trader who continues to give money away to the markets.

Using a protective stop loss continues to be the most effective method of risk management. Fortunately, it is also the easiest of the three to apply. Methods 1 and 2 are developed over time as you gain experience. Simply use my top three ways of preventing an STD and you have cut your chances of getting burned.

The numbers don’t lie! 9 out 10 stock traders will fail, miserably! That is the same ratio for starting a business. At least in the case of running a business, there’s a 5-year failure window. I would say that a very small minority of beginning traders makes it past their first year. The reason for such an unbalanced success/fail ratio is simple. 9 out of 10 people entering the market would be better categorized as gamblers and not traders. Yes, I too, was one of those gamblers masquerading as a stock market trader.

Successful traders employ proven, winning trade strategies. Most beginning traders systematically make the same mistake over and over again. Venturing into the market without a sound trading plan is financial suicide. Here is a guide to structuring your own winning trading strategy.

Many principles of running a successful business can be applied to stock trading. Having a trading plan is essential to the success of your new venture. Consider this trading plan to be your road map that guides you to stock trading mastery. Skipping this step will ensure your permanent residency in Loss Vegas.

The trading plan must outline the why or purpose for trading the markets. If your purpose is to simply make money, you are in for a rude awakening. The number one objective of a stock trader is to trade well NOT make money. Focusing on trading well will result in you making money. Making profitable trades is a by-product of trading well. Calculating profits while practicing your trade is counter-productive to your efforts. You certainly wouldn’t want a lawyer tabulating his fees while researching your case, would you? The same focus needs to be applied while you trade. There will be plenty of time for counting your windfall once you have closed out your position.

After committing yourself to learning to trade well, the next step in the process is executing the plan. This includes but is not limited to:

1. Conducting Market Research-stock selection, risk/reward ratios

2. Pinpointing Entry Points

3. Money Management- where to place protective stops

4. Establishing Exit Points

5. Trade Review

I use this exact process when trading stocks and options. Deviating from your trading plan can hinder your progression as a trader in two areas. First, the effectiveness of a trading strategy cannot be accurately measured when a trader is inconsistent in the execution of a trading strategy. And secondly, altering your strategy in the midst of a trade is hazardous to your wealth. A prime example would be moving your protective stop in the opposite direction of your trade. This allows for a wider, much riskier stop loss cushion. Moving protective stops in the opposite direction of the trade is a sure sign of a rookie trader.

Following this simple formula will not eliminate visits to Loss Vegas but will ensure shorter, less frequent stays. Happy trading and here’s to your success!

While theoretically the selling of naked options carries with it the potential for unlimited loses, in the real world this so-called risk is controllable to such a large degree as to be meaningless. Thousands of option sellers are successfully making a good living and growing their capital doing nothing but sell naked options. The fact is, all these successful traders are employing certain safeguards or protective trading strategies that allow them to defeat this ‘unlimited risk’ factor.

Those who believe that naked option selling has the potential for ‘unlimited loses’ are obviously misguided in their belief. Selling or writing naked options when done in a disciplined manner coupled with proper protective trading techniques and sound money management is no riskier than buying options. Seasoned options traders who specialize in naked writing regard option buying as a riskier, more speculative trading strategy. Statistics show there are more traders who lose money as option buyers than option sellers.

Options are decaying assets. They lose value each day that the underlying stock to which they are attached remains unchanged or moves in a negative direction. The magnitude of daily losses depends on many factors but the primary one being the behavior of the underlying stock. An option buyer (versus an option seller) is faced with this dilemma and can only be a winner if he correctly determines the movement of the stock and the magnitude of the move. If the market moves in the opposite direction or if it does not move at all, the option buyer is a loser. The option buyer must not only correctly foretell market direction but his prediction must be accompanied by a major move in the market. A less than significant move will still result in a loss for the option buyer.

On the other hand, the option seller takes maximum advantage of the decaying characteristic of options. As an option seller he merely sits and waits for the option to lose value daily to the point of being worthless on expiration day. He does not need to correctly predict market direction to generate profits. If he sells puts, he is a winner if the stock stays flat, a winner if the stock goes up. He can only lose if the underlying drops far enough to hit past his strike price position. This means that even if the stock goes down he is still a winner if the move is not far enough to hit his strike position. If he is a call seller, he wins when the stock drops, stays flat or moves up less than significantly. Admittedly, during the validity period of the option until its expiration date, the option seller faces the potential threat that the underlying stock may move continuously against him past his strike position, in which case there would be no limit to his loses. But this can only happen if the seller is careless enough not to watch and monitor his position on a regular basis!

Options are not ‘buy and hold’ securities. All options traders, buyers and sellers alike, carefully watch their positions on a regular frequency. In their march towards expiration dates options are always in motion in tandem with their underlying stocks thereby continuously presenting opportunities for making profits or presenting danger signals for incurring losses. Option sellers are a more cautious lot than buyers and consequently sellers have developed various protective trading techniques to offset the so called ‘unlimited risk’ factor to the point where it is nearly a neglible risk. What are these trading techniques? Each option seller may have his own system but here are a few strategies that conquer the risk.

1.       First and foremost and probably the most important thing to consider when getting into selling options is the choice of securities. Highly volatile stocks are most susceptible to the highest risks because of their potential for making dramatic price moves up or down. While volatile stocks tend to offer attractive option premiums, this benefit can be cancelled by the higher risk of a major negative move. A price gap out in a stock can cause severe losses. Conservative option sellers who make a living or grow their wealth selling options will often tend to play ETFs (Exchange Traded Funds) or Indexes instead of stocks. These securities seldom undergo dramatic one day moves and it is even less vulnerable to price gap outs.

2.       Careful monitoring of position – As mentioned earlier, option sellers tend to be a cautious lot and anyone who sells options and does not watch the progress of his position can only be considered dumb or stupid. One does not need to be glued to his computer screen and watch every move in the stock market. He only needs a cursory look at the market now and then to see how things are developing. When a situation starts building up where one’s short position may be in danger, action can immediately be initiated before it degenerates into a bad situation. The option sold may be bought back immediately at a slight loss before it gravitates to bigger losses. This slight loss can be no more than what an option buyer would be exposed to in a similar negative scenario. And this is assuming the option seller does nothing more than buy back the losing position. But if his monitoring is combined with the other strategies illustrated below then the risk of loss is nearly nil.

3.        Use of stop losses – For the trader who does not have the time to occasionally watch the market he may use stop losses on his positions at the same time that he initiates the short positions. There is no need to explain here what a stop loss is as it is presumed anybody who is in the stock and options market knows what this is. Additionally, with the advent of online trading, electronic alerts can be initiated with brokers so that when a perilous situation starts developing an automatic alert signal is sent to the trader’s email, iphone, or cell phone.

4.       Use of credit spreads – Here again there is little need to explain what a credit spread is as once more it is assumed that options traders know what this strategy entails. This trading method coupled with careful monitoring and the use of the stop loss is enough to almost guarantee that the option trader will never be exposed to the fear of ‘unlimited loss’.

5.       Use of the roll-out feature of options – This is one strategy that is not being used to maximum advantage by many option sellers. Based on their personal trading experiences and extensive use of this feature those who have been using it swear by it as a powerful defensive strategy in preventing losses in option selling.

Strategy number 5 above is effective enough when used alone and by itself, but when combined with the other strategies above, the whole system becomes a formidable program that almost totally eliminates losses in option selling. One particular options seller has personally developed his own system of using a combination of all the above in his option trading activities and he says with much confidence that he sleeps very well at night thinking he will never ever be subjected to the so called risk of ‘unlimited losses’. He has written an e-book about his system and in it he describes in much detail the methodology he uses in overcoming the risk. Anyone interested may visit his web site at: http://www.theoptionseller.com

For those who are contemplating of getting into the option selling business, pay no heed to the naysayers. Next time you hear someone say “naked option selling is extremely risky due to the potential for unlimited losses” that person is most likely an option buyer who has never ventured into the lucrative field of option selling. His remark obviously comes from his ignorance of the inner workings of options and the various safeguards available to the option seller. To the knowledgeable option seller the risk of losing money is less than the risk facing the option buyer.

This means that at any given moment in time, you might have a different opinion of the potential movement of that stock. Knowing this, there is a way to address your present level of confidence or “lean.” You do this by your choice of which option you sell.

While it is true that the at-the-money option has the most amount of extrinsic value, it might not always be the ideal option to sell in every situation.

For instance, if you feel that the stock itself has a very high chance of producing capital appreciation above the potential amount of premium you could receive from selling an at-the-money call, then sell an out-of-the-money-call so you can allow yourself a little more room to the upside on the stock.

For example, let’s say the stock is trading at $27.00. Normally, you would sell the 27.5 calls at say $1.00. If the stock were to rise quickly and eclipse the $28.50 mark, then with the buy-write strategy, your position would have maxed out at $28.50, and you would have a $1.50 one month gain. Not bad, but if the stock went to $29.50 then you would have missed out on another $1.00 profit. However, if we had sold the 30 calls for $.30 then we would have another outcome. You bought the stock at $27.00 and sold the 30 calls for $.30 and the stock goes to $29.50.

You would have made $2.50 in capital appreciation and $.30 in option premium for a total of a $2.80 return.

So, if you feel the stock has a real good shot at taking a run up, you can lean your position long by selling an out-of-the-money call.

If you have a more neutral view on your stock you would sell an at-the-money-call in order to receive a bigger premium which allows for greater downside protection if the stock trades down and higher potential profit if the stock becomes stagnant.

This strategy also works on the downside. If, by chance, you feel that the stock may trade down a bit during the life of the option, then you can sell an in-the-money-call. The effect of this would be to provide you with a little extra premium to cover more downside risk.

Remember when you sell an option you seek to capture extrinsic value. An in-the-money option not only has extrinsic value but also some intrinsic value.

When you feel that you want to lean your covered call strategy (buy-write) a little short, choose to sell an in-the-money call so you can also have some intrinsic value to cover your downside.

As an example, say your stock is trading at $29.00 and you feel that your stock may trade down a little but still remain in an uptrend cycle. You don’t want to get rid of the stock but you also don’t want to lose any money so you sell the 27.5 call at $2.00.

The stock starts to trade down and finishes at $26.00. If you had owned the stock naked, then you would have lost three dollars since you owned the stock at $29.00 and it closed at $26.00 on expiration.

However, because you sold the 27.5 calls at $2.00, you would only realize a $1.00 loss in the stock. The premium received will offset the loss due to the fact that you identified and adjusted for a likely move.

As you can see, the buy-write strategy can be altered to fit any directional view you have on your selected stock.

Finally, if you intend to use the buy-write strategy successfully, you generally need to sell the calls against your stock on a consistent, recurring interval, over a period of time.

This means that you will have to be prepared to “roll” your calls out to the next month come expiration. Sometimes, all you’ll need to do is to sell the next month out call.