10 Rules for Speculating with Options

1) Be patient. Don't invest everything right away. Decide how much you want to risk in options during the next 12 months and spread your purchases over that time frame.

2) Diversify. Don't put all your eggs in one basket. Take at least two or three positions, and try to always own both calls and puts.

3) Minimize your risk. Pay as little as possible for each option. And always be ready to cut your losses.

4) Plan before you play. If you do not have a game plan that tells you when to take profits and when to cut losses, you will have a very difficult time making a profit.

5) Don't be greedy. The downfall of 90% of all options investors is greed. Putting all your money down on a "sure thing" is a certain recipe for disaster.

6) Maximize your leverage. Try to buy options that will increase in value by at least 100%. Buying cheap options is the first step in this strategy.

7) Buy options on high-volatility stocks. You have a limited amount of time to work with. Your best plays are on volatile stocks.

8) In general, buy out-of-the-money options. These options normally have lower prices, and they tend to carry less risk.

9) Buy undervalued options whenever possible.

10) Be patient. This rule bears repeating. Contrary to popular belief, buying speculative options is not a game that requires action every day. Successful options-buying requires patience and selectivity. It is the only way to win this game.