Savvy investors can use options to leverage assets and control some of the risks in the market. Stocks are used to cut loses, protect gains, leverage potential risks or control large amount of stock using a small cash outlay. A trader can benefit whether the stocks are going up or down or sideways.
However, options trading education is helpful because even most survey traders are likely to lose by misjudging an opportunity.
Mistake #1: Starting to buy out-of-the-money OTM call options as newbies: This is one of the most difficult ways of making money consistently when working with options and it is advisable to try some other strategy first.
Mistake #2: Using an all-purpose for all market conditions: Make sure you are able to tailor your trading strategies depending on the market conditions. For instance, you may be better starting off with options trading education on long spread.
Mistake #3: Lacking a definite exit plan before expiration: An exit strategy is not only helpful when things are going awful. It also works when things are working your way.
Mistake #4: Trying to make up for past losses using risky doubling up: Your tolerance to risk is definitely put to test when a trade moves against you. Otherwise, don’t take another approach in order to mitigate your losses.
Mistake #5: Trading illiquid options: You may lose money due to poor pricing when you initiate or adjust an option associated with low activity.
Mistake #6: Too much delay in buying back the short options
Mistake #7: Leaving the earnings and dividend date out of the strategy: It is commonsense to avoid trades with pending dividend. Make sure you are able to understand how the stock volatility and price inflations are affected by the trading season.
Mistake #8: Failing to know what to do if assigned early: Keep your early assignments in mind from the word go to avoid being caught in a bind when an event occurs that is irrational and disrupts the market. For instance, it can be tricky if you have not factored in the assignment possibility and are running a multi-leg strategy.
Mistake #9: Leaving out index options for neutral trades: You can shield yourself from costly market volatility by trading neutral on big indices although this may not sound an exciting option.
Mistake #10: Legging into spread trades: Rookies and experienced traders that want to squeeze the last bucks out of trade usually make this mistake. Many traders beginning to trade options want to lower cost by a few pennies (which is not worth the risk), by legging into a spread by buying the option first and selling the second option at a later date.
If willing to trade a spread, do not use a losing strategy such as buying a call then timing the second one in order to get more money out of the latter leg. You will lose if the market takes a downturn as you won’t be able to pull of the spread. For more business and finance news visit Emerging NewsHub 24.