5 Option trading mistakes you should avoid
In This Article, We Are Going To Discuss About 5 Option trading mistakes you should avoid
We usually see that the options trader make lots of profits while trading in the options.
Many option trading strategies help us in hedging our losses which we may incur when trading in the stock market.
But options traders also make huge amounts of losses as they commit a lot of mistakes especially when they just start trading in the options market.
Incurring profits from the first two-three trades make the novice traders confident but after that they end up making huge losses.
They start getting overconfident and start making mistakes due to which they end up making huge losses when trading with options.
List Of 5 Option trading mistakes you should avoid
List Of 5 Option trading mistakes you should avoid Given Below
In this blog, we will cover the top five mistakes that options traders make when trading in the options market:
- Trading options without Knowledge:
The first mistake that novice traders make is trading in options without knowing it.
The traders hear or see that there is a huge profit in trading in options so they directly jump in it.
Options is a very vast subject and there are a lot of important topics that options traders should know before trading in them.
An option trader should know volatility, greeks, types of options available in the market, strategies, premium, margin, and so on.
Without having, knowledge traders can incur big losses in the market and they began to treat trading as a game of gamble.
The successful options traders end up making huge profits as they have knowledge as well as experience in trading in the options market.
- Selecting the wrong Expiration date:
Novice traders often face the difficulty in choosing the expiration date and they end up selecting the wrong expiration date.
When selecting the right expiration date, there are certain parameters that traders should consider.
Some of the parameters are the liquidity in the underlying assets, the timeframe in which the prices could move to the expected levels if any results or any corporate announcements that are going to made by the company.
Traders should consider all of the above factors before choosing the expiration date when they buy or sell the options.
- Selecting the wrong numbers of lots:
Traders usually select lots based on their emotions that are fear and greed.
Some traders are overconfident of their options strategies and because of this reason, they select many numbers of lots in the greed of making lots of profits.
Some traders even borrow money from their brokers and buy lots in the view that when they make a profit then they can payback
But what happens if some negative geopolitical news comes in the market and the prices move in the opposite direction of what you have expected.
This may not only make losses but you will not be able to pay back the borrowed money due to your greed.
- Buying OTM Options:
Buying Out Of Money call options may be cheap but it is one of the hardest ways to make money.
Novice traders buy OTM call options as they are cheap but if their trade goes in the other direction, then they also can incur a lot of loss.
Those who buy this type of option, follow the strategy of buying low and selling high.
But what happens if this strategy does not work out every time?
This may discourage the novice traders to trade in options as they would incur a heavy loss if this strategy does not work out for them.
- Neglecting Volatility:
Implied volatility is a measure of the expected volatility in the market in the future for a particular stock.
The traders need to analyze if the implied volatility is low or high, as it helps in determining the price of the option premium.
The traders should know if the premium is expensive or cheap as it helps in deciding the option strategy that they should take when trading.
If the options are cheap, then the traders should select debit strategies, on the other hand, if the options are expensive, then they should choose credit strategies for trading.
The above are some of the mistakes that options traders regularly make when trading with options.
There are many other mistakes such as having no exit plans, having no trading plans, trading in the illiquid options that novice traders make when they start trading options.
To learn how to trade options will help you make lots of gains but you may also incur lots of loss if you keep making the above mistakes.
So before entering the options market make sure that you have enough knowledge about the same and don’t be in a hurry in making profits.
Sakshi Agarwal is a post graduate from a financial background. Her favorite topics of interest to write about include technical analysis and investing. She is currently working at www.elearnmarkets.com as a research analyst.