Options trading is a great investment avenue for people who understand the ins and outs of this arena. There are low-risk strategies that make it incredibly accessible and highly supportive of realizing a viable profit. However, anyone who begins this journey needs to be well aware of the most common mistakes in order to yield successful trades. This guide covers the topic below.
Contents
Ignoring Strategies
This first point talks about why it is important to steer into viable strategies. Why? Because the alternative of just diving in with no agenda is not a strength but a weakness in the world of options trading. There is no room for novice guesswork here, as you must save all of your predictions for monitoring investment assets. This must always be backed up with a core set of reliable trading strategies. It is incredibly important that you move with what works for your investment goals and your knowledge base so that you can implement durable actions that will take you where you want to be. It is far better to match a potential option trade with your plan of attack as opposed to acting on hearsay.
Rejecting Further Learning
If you get to the stage where you feel confident enough to trade options, then you have an assumed level of investment knowledge. While this will certainly serve you well, the only way to continue down the path of success is to continue this acquisition of knowledge in full force. Never shy away from comprehensive literature or expert advice like The Complete Guide to Option Selling. This is where you will find new tips and be able to add to your own insight in a meaningful way to boost not just your portfolio but your trading habits as well.
Playing it Safe
It is beneficial to stick within a framework that makes you feel comfortable. However, there is an overarching risk of playing it too safe which will put your entire portfolio and investment venture at risk of crumbling down around you. What this means is that anything you acquire options wise must be diverse and it must be a good fit. Instead of just purchasing the same type of call contract, there is a pressing need to mix the pot a little and also consider puts. The way you work with these contracts will also have an impact if you play it too safe. A go-to set of strategies is recommended, but it is important to strive for diversity in how you trade as well so that you are embracing the risks that are more likely to pay off.
Reckless Impulse
This is not an area where you can be impulsive. Each option you trade has to be well researched, projected, and observed before you go ahead and take the leap. A lack of research will leave you with a handful of poor trades that may have looked good initially but ultimately yield nothing or even a loss. Accumulate enough losses and you are vulnerable to financial ruin. It is easier than you may think to make bad decision after bad decision, and it all comes down to how much you put into the process both cognitively and fiscally.
Ignoring Volatility
Options traders who do not factor in volatility are bound for a miserable trading cycle. There is no way to get around it: the fact is, options need to be assessed in terms of volatility in order to make a trade viable. The options market can be noticeably volatile at certain points, and it is up to you to keep track of what’s happening on any given trading day. If you are spending money, you need to know about the risk you are also buying. By assessing an option’s volatility, you have a better chance of successfully predicting the strike price, overall premium, and whether or not it is worth your energy and money.
Being Overconfident
When it comes to options, it is essential that the trader has considered their own capacity for handling risk. If you are not entirely comfortable with being in the lurch, this may not be the arena for you. However, if you are confident that you can navigate risks without falling to pieces, then it is a good place to move into. Being overconfident is not a good idea because it may mean you face losing a ton of capital based on a less than smart investment.
Options trading is for the expert investor. There is an assumed degree of knowledge and intensive vetting from brokers too. Step back from the most common mistakes to properly protect your journey.
