Options Trading Mistakes to Avoid

BY: W W W. O P T I O N S -T R A D I N G - E D U C AT I O N. C O M

Options Trading Mistakes to Avoid

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Making money in options trading has to do with picking the right trades and avoiding several basic mistakes.

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We would like to offer up a handful of options trading mistakes to avoid. These include




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Limiting yourself to out of the money call options




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Working with a single all purpose options trading strategy




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Not having a clearly defined exit plan for all trades




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Changing your trading strategy in a moment of greed or panic




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Trading options on equities with poor liquidity




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Forgetting about dividends




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You can make money buying options and you can make money selling options.




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And you can lose everything with a couple of bad trades. Here are our thoughts on options trading mistakes to avoid.




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Options Trading Strategies




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There are many potentially profitable options trading strategies. There are two basic options trading mistakes to avoid in regard to trading strategies.




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http://www.options-trading-education.com/6555/profitable-options-strategies/

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One is that if you are working with a strategy appropriate for the situation stick with it.




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The other is that not all strategies are appropriate for all markets and all market conditions.




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Some traders only focus on buying calls on out of the money options. This can be very profitable when the underlying stock goes up substantially in price.




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Unfortunately, out of the money options are out of the money for a good reason. A lot of smart people have decided that the stock in question is going nowhere.




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There is a lot more opportunity in the options market than just looking for promising out of the money call contracts.




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In a very volatile market a popular strategy is a long straddle. The trader buys both a call and a put on the same stock with the same expiration date.




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The rationale is that if the market is very volatile it is bound to go up or down sufficiently to render a profit in one direction or the other.




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However, in a more normal market there is typically only one direction in which a stock is likely to go and in those cases one is simply wasting money on buying either the put or the call.




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This is one of the common sorts of options trading mistakes to avoid because it simply increases the overhead of trading that you have to surpass in order to gain a routine profit.




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Picking an Exit As You Enter




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Greed and fear are the eternal enemies of all traders. Two of the most common options trading mistakes to avoid are staying to long in a trade and losing a profit and getting out too late and absorbing big losses.




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When you go into a trade you should have a precise plan for getting out. If you will be happy with a thirty percent profit on your trading capital then get out of the trade when you have that.




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Likewise if you are willing to absorb a thirty percent loss and no more, get out before your loss gets worse. Otherwise fear and greed take over and there go your profits.




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Basic Options Trading Mistakes to Avoid




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Do not get into a situation where you cannot get out of a trade. This is what happens when you trade options with poor liquidity. Avoid these situations at all costs.




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And, remember that lots of stocks pay dividends. The value of your options contract will change dramatically when the dividend has been paid.




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Remember to calculate dividends when trading stock options.




Options Trading Mistakes to Avoid

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