Learn to Avoid the Options Trading Mistakes that New Traders Make
As a new options trader, it is not unexpected to experience a feeling of being overwhelmed. One of the main benefits of options trading is that it gives you a variety of ways to take benefits of what you believe may happen to the underlying safety. One of the trades-offs for the luxury of this variety is that there are more opportunities for mistakes and more risks considering. The purpose of this blog is to create awareness regarding some common options trading mistakes that help options traders to make more informed decisions.
7 Options Trading Mistakes that New Traders Make
1. Lack of Understanding Options
Some traders jump into options trading without really understanding the reasons behind the movement of options. Little attention is paid here to details like how many does an option move for the underlying index, the Greeks that are used for the calculation of option prices. Generally, some traders know which strike price will offer the best risk-reward trading opportunity in case of a small move or large ones.
Click on Below Video: Short Term Trading Success (Forex Trading, Options Trading)
2. Buying Out of the Money Options
Lack of understanding options results in retail traders buying options which are out of the money for the reason that they are cheap. An occasional win trade results in the trader getting fixated on buying out of the money options. In few cases even when the trader is right in trade, he loses money in the out-of-the-money trade since it needs a very sharp and fast move for those options to become profitable. It has found out that trading in out of the money options is one of the biggest reasons for options trader loses.
3. Using one Strategy that Fits all
Options strategies are rarely understood, and investors end up trading in vanilla call and put options and losing money in all the process. In these days many brokerages offer option trading strategies to choose from, making it simpler for investors to select, but few investors utilize these services.
4. Not having an Exit Plan
Few traders lose money in trading because they don’t know when to exit from an option position even if they are right. The truth of that holding on to a position as time passes erodes the value of the option is rarely understood. Likewise, since the amount involved in options is small traders do not trigger the stop losses. They tend to hold the trade in the hope that a move in their direction will result in a successful, profitable exit. Ones an option goes out of the money as the underlying index moves away from it, it would require a huge move for it to come back to its breakeven level.
Click on Below Video: How do you time Entry and Exit Points?
5. No Clue of an Event Calendar
Option prices tend to over-react when an event is approaching. Investors read the rising value in options as a sign of a big move in its direction. Rising option prices is the premium that is being made in anticipation of a sharp move in either direction.
6. Writing Options without Proper Risk Management
Many times new trader tries to behave like a professional trader and gets in the act of writing option where returns are limited while risk is unlimited. But he imitates the pro only partially. While a professional trader is either hedged correctly in his position or keeps an iron-tight risk management system of stop losses in case of a move against his position, a retail trader leaves his option writing position open. It takes one wrong trade in this direction to wipe out months of gains for the trader.
Click on Below Video: Options Trading Risk Management
7. Lack of Understanding of Time Decay
Another big factor that plays against a retail trader is lack of knowledge of time decay on option prices. For an option price to rise, the underlying index needs a move in line with the option to bet and fast. A grinding move plays against the buyer of an option. As time passes options lose value faster. Some retail traders hold on to their trade or take a new bet close to the expiry of the market because option prices are lower during this period. But most trades close to the expiry period turn out to be losing ones. Unfortunately, a new trader holds on to his position since the amount involved is small. It’s these seemingly small loses are what cause the most damage to a new trader.
Trading options involve some considerations both before and after the trade has been placed. The most important step to trading options is to develop a trading strategy and stick with it. Some of the tools and resources that help you get your own plan include the Options Strategy Guide, Probability Calculator, Key Statistics and the Profit/Loss Calculator. Take advantage of these and other trading tools and resources that help you to avoid these common options trading mistakes in your future trades.