Don't hope for the best -- plan your exit

There is one important question you need to address before ever getting into a trade: When am I going to get out?

As we discussed in No. 5, if your trade doubles in value, you can decide to take profits in half the position. But what if your trade goes down? You can set a sell stop (in the case of buying options) or a buy stop (in the case of selling them) from the outset so that if the position goes down a certain percentage, you're automatically taken out of the trade.

Many traders set a "mental" sell stop to head for the hills if their option loses half of its value. But it's just as easy to tell your broker the specific level at which the trade should be closed. That way, you don't make a decision based on emotion -- just because you "hope" a trade will recover.