Use Options to Boost Your Returns

But keep in mind that even speculative or flier-type positions should start with defined parameters with price limits for entry and exit points and a set stop-loss limit order in place once the position is executed, unless the risk is minimal.

Again, this reaffirms my belief in the importance of risk management, and also means you don't need to be tied to your computer all day. It also heads up the point that nothing goes up forever, making the notion of achieving unlimited profits a siren's song.

More often than not, such speculative plays will be losers, and by clinging to the position, you are increasing the probability that the losses will be 100% of the initial investment. Be prepared for this by having reasonable expectations in terms of profits and acceptable losses.

Keep Cash on Hand

Why keep nearly 50%, or $50,000, of the model portfolio's resources sitting in cash? Unlike buying or selling common stock, trading, which basically has an on-off switch, options trading is more dynamic and three-dimensional.

As the price of the underlying stock moves, it offers opportunities to make adjustments, which often involves expanding or adding to the existing options position. The key to producing consistent profits is having sufficient capital available both to defend and lock in profits when changes in price and market conditions occur.

The combination of starting with a defensive strategy in place and keeping available cash on hand allows you to withstand the inevitable drawdowns that occur in every portfolio, make appropriate position adjustments and, most importantly, react and take advantage of volatile situations.

For the most part, trading options is about grinding out small returns on high-probability trades. But the biggest winners are usually contrarian plays. It's important to always have some ammo ready to make a stand when everyone else is panicking.