The Most Important Rule for Options Investors to Know

Investing using options is very different from constructing a classic long-term buy-and-hold portfolio.

In this segment from Motley Fool Live that first aired June 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss the one rule that’s most important for options investors to keep in mind.

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Ellen Bowman: Covered calls are the least likely to blow you up. There many options strategies that could do you a lot worse, and so it’s for that reason that in the service there are seven Options rules that we follow, which we thought would be what we would discuss today. Because while it’s awesome to discuss strategies and how to use them and how to employ them, it’s also really good to hear Jim explain. This man has a long history of investing with Options and making them work for him, and these are the things that he has learned. Every time we open a service, we would pass these along and say these are sacred. I thought, in my investing life, and in any other members who might be watching who are ready for Options as well, might want to take a look at these and certainly not going to hurt me to go over them. I thought, Jim, I would start by asking, we’ve got seven of them. If you’re an Options member, you can find them on our guidebook. If not, I’m going to read them out loud real quick. Then I want you to tell me which is the most important. Whether they go in order of importance. I want you to pick one and tell me if you had to [laughs]. Number 1, valuations first, options second. Number 2, think long term but you short term strategies. Number 3, we write options more often than we buy them. Number 4, diversification if necessary but not necessarily diversification, which is such a [laughs] Jim Gillies phrase, I love it.

Jim Gillies: Jeff and I put those together, that was mine. [laughs]

Bowman: Yeah, that’s your brain, I can tell.

Gillies: [laughs] That was mine.

Bowman: Definitely. Number 5 is we stay focused, number 6 is we go our own way, and number 7 is we believe in the power of community. Of those, if we get hit by trains right now, what’s the one you want to talk about first?

Gillies: I get hit by trains.

Bowman: [laughs] You know what I’m saying.

Gillies: I’m on the second floor of my house so there’s something bad going to happen to my neighborhood. This will probably surprise no one. The one that I think is the most important is valuation first, options second, which conveniently is also number 1.

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