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Trading options have their benefits and risks. The plethora of strategies available to play within options trading can make not just inexperienced but veteran traders make errors. Trading options is complex, so why make it inflexible? Here are some common pitfalls options traders can avoid.
No exit plan
At Steady Options Education Center, learners are taught about the significance of emotion control, while trading options. It does not mean to gulp fear or have ice flow through veins but be prepared with a detailed trading plan. Your emotions may push you to deviate from the plan but stick to it. An exit plan is not just about lessening the losses, during downside but it even helps when trade is in your favor. Plan a time frame for every exit.
Options decay, so as the expiration date approaches the decay rate accelerates. Therefore, if you are in a long put or call and the price does not move as expected within the anticipated time frame then get out. Well-planned trading helps to establish successful trading patterns and keeps emotions in check.
Double up to recover past losses
Options are derivatives, so the prices never move the same way or have the same properties as the underlying stock. Doubling up can lessen per contract cost bases associated with the complete position. Usually, your risk is compounded.
Therefore, in situations when the trade goes in the opposite direction it is sensible to close the trade and cut the losses rather than doubling up. Options are a great way to earn more with less capital outlay but it can blow quickly if you dig deeper. So, accept the losses rather than experiencing a big financial catastrophe.
Choosing wrong expiration
There are so many choices for an expiration date that it can overwhelm you. However, you need to develop a stance to choose an ideal expiration date. To choose the best expiration date consider, how long you feel the trade will take to play out. Is there sufficient liquidity to cover your trade? Do you wish to hold through a stock split, earning announcements, or other events?
Implied volatility measures the expected market volatility of a given security in the future. It is essential to identify the status [high/low] of the IV because this will help to determine the option premium. Knowing premium [costly or cheap] status helps to determine the options strategies to employ. If options are inexpensive consider debit strategies and if they are costly look for credit strategies.
Delays in buying back short strategies
Always be prepared to buy back the short strategies early. In situations, when trade is in your favor, it is tempting to rest with an anticipation that the price will continue to increase. This is not always possible because it can suddenly turn south. The golden rule is if you get to keep more than 80% of your original gains from option sale then buy it instantly because if you wait very long the short option will put a dent.
Trading options involve lots of consideration before, during, and after placing the trade. The most important aspect is to create a detailed trade plan and stick to it!