Don't put too much money into one trade
Options are not long-term investments -- they are calculated tools that provide immense leverage. But, this leverage can work both ways, so make sure to never risk more in any one option trade that you wouldn't be OK with losing if the trade turned against you.
Remember, one option contract enables you to control 100 shares of the underlying stock, so even if a contract might cost $50, if you normally buy five or 10 contracts, you shouldn't buy 20 or 30.
It might seem like you're shopping at your favorite wholesale club, but if that trade turns against you, you're placing $1,500 at risk. That might not seem like a lot of money, but if you've shorted a call -- which gives the call buyer the right to purchase stock at the option's strike price -- and you aren't in possession of the underlying stock, you could find yourself scrambling to get 3,000 shares to turn around and sell.
Suddenly, that inexpensive option doesn't look so cheap anymore!
You don't have to buy the same number of contracts with every options trade you make, especially when trading the options of higher-dollar stocks.
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