Mistakes Investors Trading Options Make
Many traders are eager to take the plunge and invest all their money into the market right after reading introductory information such as this. In this chapter, we will go through some of the key mistakes new traders make that can be very costly. Learn from these mistakes and resist the temptation to commit them.
1. Being Emotional – This is really the number one mistake traders make when they start trading options whether they realize or not. Having the discipline to control your emotions in times of stress differentiates a gambler from a great trader. The ability to do so will allow you make impartial decisions that greatly improve the odds of you winning. An excellent way we would recommend is to write a note to remind yourself and paste it somewhere you can easily see. This will serve as a reminder to keep your emotions in check.
2. Buying “out-of-the-money” Call Options – Buying OTM call options is an intuitive way trade options (buying low, selling high). However, understand that in trading intuition can often lead to big losses. Do not limit your strategies to simply buying OTM calls and not wanting to explore other avenues of trading. Option trading is starkly different from stocks trading because of its complex mechanics. New traders often ignore the value of time and fail to realize that not only do they need to be correct about the direction of price movement, but they also need to be spot on in the time frame.
3. Adding to Losses – Adding to losses really means compromising your risk tolerance or trading rules to make up for past losses. If a trade is moving against the intended direction, a new trader will often attempt to buy more of the losing options to average down on the cost incurred. However, if you think about it such a strategy simply does not make sense. Options are derivatives, which means their prices do not have to move in sync with their underlying assets. When such a scenario happens, always fall back to your original plan that caused you to invest in this contract in the first place. If you have deviated too far from it, it probably is time to get out!
4. Not Planning the Exit – Options trading is really about minimizing losses and maximizing profits, just like investing in any other financial instruments. Many traders worry about getting out too early or getting out too late of an option and often end up not doing anything at all. The result is that a perfectly profitable trade turns into a loser or a breakeven trade snowballing into a disaster. Before you enter any trade, always know at which price point will you close your position or exercise the option.
These are the 4 MOST common trading mistakes traders make when starting out with their options trading journey. Of course, there are many more advanced strategic mistakes, which you can look into once you have gained more experience.
One more thing…
Always trade with a paper account before using real money. Practice makes perfect and given the nature of options, it is crucial that you get your feet wet with virtual currency first before tossing your hard earned money into the market. Educate yourself BEFORE the market educates you!