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This chapter is from the book

Chapter 1 Major Learning Points

Remember the six major prerequisites:

  • patience
  • perseverance
  • knowledge
  • honesty
  • pre-planning
  • discipline

Start to build a plan. The plan should encompass the following:

  1. What stocks or other assets should I be considering for successful trading?
  2. What direction do I feel comfortable trading in (up or down)? Could I consider trading put options if a stock or the market is falling?
  3. Have I checked the news items for the particular asset I am trading? Are quarterly or other results out soon? Is there a major announcement from the government out soon? Could these announcements affect my trade? Can I use them to enhance my position, or shall I wait until the announcements are made?
  4. Do I want to check whether this company makes money and other Fundamental Analysis?
  5. Have I checked the graphs and done any Technical Analysis? Am I missing something obvious like a basic Double Top or Triple Top chart pattern?
  6. What strategy and risk profile do I feel comfortable with trading?
  7. For each trade, what is my entry point, exit point, and time of exit?
  8. Do I know my Risk, Reward, and Break-even Points?
  9. What price am I looking for to execute my trade?
  10. Where do I take my profits, and where is my STOP LOSS?

We’ll review this list as we go along every chapter. So far, the main questions you should be able to start to consider are those in bold. By the end of the book, you’ll be able to answer all of them and begin to build your own plan.

You have now learned what the essential risk profiles look like and what they mean to you in terms of maximum risk and reward.

Profile

Description

Risk

Reward

Breakeven

Buy asset

Purchase price

Unlimited

Purchase price

Sell asset

Unlimited

Short sale price

Short sale price

Buy call

Call premium

Unlimited

Strike Price plus call premium paid

Sell call

Unlimited

Limited to the call premium received

Strike Price plus call premium paid

Buy put

Put premium

Strike Price less put premium paid

Strike Price less put premium paid

Sell put

Strike Price less put premium received

Limited to the put premium received

Strike Price less put premium paid

We can now progress to Chapter 2, "Into the Marketplace," where we start to explore the reality of trading options with real numbers.

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