It sucks to lose money. It sucks to be a newbie trader because that is when you’ll make the most mistakes. It takes time and effort to learn tricks of the trade and master the art of trading options.
There is literally so much to learn that making mistakes and losing money is just a matter of when. When will you make a stupid trade, which will be a loss making venture for you? But that is what we want to avoid.
In this article, we’re going to cover top 10 options trading mistakes that almost every rookie trader makes. Sometimes even experienced traders misjudge and make these mistakes because either they get carried away or do not pay much attention.
Trading OTM calls is the easiest way to get started but at the same time, it is the easiest way to lose money. Hence, if you wan to make money consistently, it is one of the most difficult option. If you’re new to options trading, consider investing small amounts or try another strategy first.
When a trade moves against you, it’s tempting to forget the risk, expiration date and repeating the same trade again. Just have a look at stupid trades and tremendous losses I incurred with mistake #1 and #2. You should instead try another approach to mitigate your losses.
Market sentiment, trading conditions keep changing all the time. One strategy which made you money yesterday is not a guaranteed money making strategy for tomorrow if market conditions have changed. You need to tailor your options trading strategies accordingly. Tailor and adapt!
Especially when an option trade is not going your way, you need to have an exit strategy. Booking your losses and getting out is many a times better option that hanging on to your options because unlike stocks, you cannot hang on to your options forever. It is very likely that time decay will render those options worthless.
Low volume options may be available at lower price but the biggest drawback to this strategy is that you may not be able to square off the trade. When you trade options, pay close attention to the open interest numbers. The more open interest there is, the better it is.
This is a common mistake among rookies and experienced traders hoping to squeeze the last few bucks out of a trade. Do not fall for it!
Trading ETFs may not sound exciting but this approach can shield you from costly market volatility.
Options get a lot of activity near to the quarterly results date. If you don’t pay attention to the expiration dates, you could trade an option that expires before the anticipated event and your options will expire before becoming profitable.
When you sell an option, you have an obligation, not a right. If the buyer assigns the contract, you must buy or sell accordingly. If you sell a call, you must sell the stock at the strike price. If you sell a put, you must buy the stock at the strike price.
There’s no rhyme or reason why a trader would exercise an option early. As an option seller, you must be prepared for this situation. You’ll need enough cash to cover the transaction or have possession of the underlying security.
The size of your trade should match your portfolio. Before investing, figure out how much you are willing to risk on any one trade. Always think of worst-case scenarios and don’t risk your entire portfolio.
On the flip side, though, you don’t want to risk too little. You may play safe and not lose anything but that may also lead you to leaving money on the table.