Trading options attract traders because they can profit from stock prices going up and down. Options strategies are also used to protect your gains cut the losses and control a large number of stocks with comparatively small cash expense. The advantages sound great but here is a hindrance. If you are not careful, more than the invested amount can be lost in a short time when you trade options. Seasoned traders also lose money when they misjudge an opportunity.
If you are a new options trader, it is wise to become a member of options trading service and learn to trade smartly. Steady Options are advisory services that have been offering actionable trade ideas and resources to sharpen your skills. It has gathered a helpful and valuable community, which is an active trading forum.
Awareness about the common option trading mistakes will help novices to make an informed decision. They can avert the costly wrong turns.
Beginners misuse leverage factor without realizing the percentage of risk they are undertaking. Leverage tool allows you to multiple your investing capital and thus the potential to earn huge profits increases.
You will also need to understand that the potential of huge losses also increases or all your money can get wiped out. Therefore, learn to calculate the leverage and avoid taking big trade sizes. Start small and stick to it till you master leverage!
Have no exit plan
Emotions play a huge role in trading. You need to control them, which does not mean swallow every fear but indicates to have an exit plan. Choose a downside and upside exit plan for your timeframes in advance.
Some trader’s worry, ‘What if you exit early and leave some extras on the table?’ The best answer is, ‘What if you enjoy a consistent profit, decrease loss incidents, and sleep peacefully?’
An exit plan will control your emotions. Never get greedy, if you reach the upside goals and never feel tempted to expose yourself to more risk when you reach downside stop-loss. Clear the positions and stick to plan!
Fail to consider the upcoming events
All happenings cannot be foreseeable in the market but keep track of two main events while trading options – dividends and earnings of your underlying assets. You have to be familiar with the upcoming dividend date to steer clear from selling options. Trading in earning seasons means high volatility regarding the underlying stock rates [usually inflated] can be encountered. Be sure to consider the upcoming factors!
Never trying new strategies
Traders need to be cautious that what is practical for stocks is not applicable in options. For example, Jack liked the stock at 90 and bought it. When the stock fell to 50 he planned to buy more and lower net cost. This doubling up strategy does not make sense for options trading.
Traders need to remember that options are derivatives and time decays is a factor that needs to be considered. In options, if you feel that the position is bad at present, then close the trade and cut the losses. You get a chance to leverage on low capital but it can be blown away quickly as you dig deeper. Small losses offer a chance to avoid future catastrophes, so accept small losses!