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Options Trading Mistakes to Avoid
Making money in options trading has to do with picking the right trades and avoiding several basic mistakes. We would like to offer up a handful of options trading mistakes to avoid. These include
Limiting yourself to out of the money call options
Working with a single all purpose options trading strategy
Not having a clearly defined exit plan for all trades
Changing your trading strategy in a moment of greed or panic
Trading options on equities with poor liquidity
Forgetting about dividends
You can make money buying options and you can make money selling options. And you can lose everything with a couple of bad trades. Here are our thoughts on options trading mistakes to avoid.
Options Trading Strategies
There are many potentially profitable options trading strategies. There are two basic options trading mistakes to avoid in regard to trading strategies. One is that if you are working with a strategy appropriate for the situation stick with it. The other is that not all strategies are appropriate for all markets and all market conditions. Some traders only focus on buying calls on out of the money options. This can be very profitable when the underlying stock goes up substantially in price. Unfortunately, out of the money options are out of the money for a good reason. A lot of smart people have decided that the stock in question is going nowhere. There is a lot more opportunity in the options market than just looking for promising out of the money call contracts.
In a very volatile market a popular strategy is a long straddle. The trader buys both a call and a put on the same stock with the same expiration date. The rationale is that if the market is very volatile it is bound to go up or down sufficiently to render a profit in one direction or the other. However, in a more normal market there is typically only one direction in which a stock is likely to go and in those cases one is simply wasting money on buying either the put or the call. This is one of the common sorts of options trading mistakes to avoid because it simply increases the overhead of trading that you have to surpass in order to gain a routine profit.
Picking an Exit As You Enter
Greed and fear are the eternal enemies of all traders. Two of the most common options trading mistakes to avoid are staying to long in a trade and losing a profit and getting out too late and absorbing big losses. When you go into a trade you should have a precise plan for getting out. If you will be happy with a thirty percent profit on your trading capital then get out of the trade when you have that. Likewise if you are willing to absorb a thirty percent loss and no more, get out before your loss gets worse. Otherwise fear and greed take over and there go your profits.