Mistakes can lead you to huge option trading losses—something investors are keen to avoid. Remember, stocks are volatile in nature—they can go up, down or even sideways. Plus, you can leverage option strategies to maximize profits, minimize losses, control stock with cash outlay. This looks appealing, right? Well, here is the real catch. With trading options, the chances of losing your entire investment within minutes are real. Scared? Please don’t.
You can still stay in the game and propel yourself to stardom. The real deal lies in proceeding with a lot of caution. Remember, even those experienced investors can misjudge any opportunity—which can lead to huge loses. They can make costly mistakes. And these are mistakes you shouldn’t make. This guide contains top mistakes you should avoid making at all costs when doing options trading. Keep reading.
Don’t buy OTM call options
Buying OTM (an abbreviation for out-the-money) call-based options can be catastrophic. With OTM calls, you have one of the hardest ways to make real money. Even more, making money with this strategy consistently can be difficult. Of course, OTM call can be cheap and appeal to new option traders. Plus, it may look like a safe place for beginners to kick start their trading journeys. However, making consistent money through this strategy is hard. It’s the surest way of losing your money consistently.
The Solution: Sell any OTM call you already own as far as your stocks are concerned. With this approach, you eliminate those risks that emanate from option selling. Plus, the approach has helped many bullish investors who don’t want to sell their stock even if the price increases.
Don’t misunderstand your leverage factor option—it will be like taking a huge risk. In most cases, beginners make this mistake. Normally, a beginner is tempted to purchase the short-term calls—based on speculative or conservative purposes.
Not having an exit plan
Sock trading is a game of numbers—often exposing traders to huge amounts of risks. Therefore, the bottom line lies in controlling your emotions. Don’t let emotions drive you. You must take control of everything.
Controlling emotions doesn’t necessarily mean swallowing your fear. All you need is to have a concrete plan. Plan how you will execute your trading strategies. Also, be sure to devise an elaborate exit plan. Of course, things can go your way—deceiving you to continually invest. However, this can be disastrous. It’s one of the worst ways of approaching the stock market. Have discipline and devise a strategic exit plan. Be a smart trader. Define your explicit exit plan. Irrespective of the nature of your trading, you need an exit plan.
Being rigid to new strategies
Options trading is witnessing a revolution. More strategies are coming up. Plus, technology is making it possible for traders to device innovative trading strategies. The tragedy is not being open to such new trading strategies. Being rigid is only going to limit your trading capabilities. So, be open to new ideas. Embrace new trading strategies. Research more. Ask fellow traders about the strategies they are using. Doing so puts you in a better position to master your trading environment—a key ingredient towards becoming a better trader.
Trading Illiquid options
Don’t trade on liquid options. Liquidity, which refers to the speed at which a trader buys and sells stock without leading to a price movement, can be tricky. So, don’t rush to trade liquid options. With a liquid market, expect ready, active buyers as well as sellers.
Waiting too long
Don’t wait for too long to make a move. Waiting too long to purchase short options is counterproductive. The best way to purchase short options is by being ready at all times.
Not factoring upcoming events
It’s important to note that all market events aren’t easily foreseeable. However, you need to pay close attention to two types of events. They include:
- The earnings
- The dividends dates
For instance, if you sell calls and there is an upcoming dividend, you might benefit by being assigned an option easily. Even more, things can be more rewarding if the dividends are expected to be huge. This can be attributed to the fact that option owners don’t have rights to dividends.
Legging into the spreads
In most cases, beginners are tempted to leg into spreads through purchasing the first option and selling the second one later. In their minds, this is the best way to lower the pennies. However, the truth of the matter is that they are only lowering them by a very small margin. So, it’s not worth taking the risk. It won’t work. Plus, you might get banned from participating in the trades and learn the hard way. So, why take the risk? No need. Don’t leg into spreads. It’s risky and will plunge you into more problems.
Not having a clear plan after being assigned
You should know what to do next after being assigned. Otherwise, things can be tough and confusing. Remember, after selling options, the chances of being assigned early are high. Plus, you will be staring at a strict expiry date. So, what are you going to do? Not having a plan is the worst thing. It’s also important to note that new traders don’t expect to be assigned after selling the options. So, they get confused when it comes to what they can do with the assignments before the expiry date. So, here is the deal—always be ready to be assigned. Have a plan on how you will use the assignments before the expiry date.
It’s your money that you are trading with. If you lose it, nobody will be by your side. So, why rush to trade and go back home with nothing? No need. Don’t rush. Rushing will make you commit mistakes. So, if you want to be a better trader, avoid the above mistakes. From not having an exit plan to trading illiquid options—these mistakes can cost you a fortune. Understand them and learn how to avoid them. Happy trading.