Options Trading is a hedging tool to manage risk and get leverage.
With Options, it is possible to earn in upward, sideways, or downward market.
There are many useful benefits of options trading.
- Reduce your losses.
- Protect Gains
- Buy the large stock with relatively less money.
Being new at option trader begin with caution.
I have almost been through every possible mistake you can think of.
I am writing this article after there.
We only strive to become a better trader every day.
An option that is used in a wrong way can quickly erode your trading account.
Below are some of the mistake new options trader make.
- 1 Mistakes Made by New Option Trader
- 1.1 1. Buy Out of Money Call Option
- 1.2 2. Not Having an Exit Plan
- 1.3 3. Not Covering Written Options
- 1.4 4. Choosing Wrong Expiration.
- 1.5 5. Wrong Position Size
- 1.6 6. Ignoring Volatility
- 1.7 7. Over Trading
- 1.8 8. Not Having a Trading Plan
- 1.9 9. Leaving Option Greek for Later
- 1.10 10. Implementing Option Strategy without Understanding
- 1.11 11. Written Option Leaving unnoticed.
- 1.12 12. Trading Illiquid Options or Low Volume Options
- 1.13 13. Leaving In The Money Option to Expiry and Get Exercised.
- 1.14 14. Not Giving Emphasis on Payoff Chart
- 1.15 15. Emphasis on Probability
- 1.16 16. Over Leveraging.
- 1.17 Conclusion Avoid Costly Mistakes which I Started With.
Mistakes Made by New Option Trader
1. Buy Out of Money Call Option
- The look cheap and tempting.
- Moreover, unlimited profit and limited loss make it even more tempting.
- Trading OTM is one of the toughest ways to make money consistently.
- Same is the case with Far Out of The Money.
- High volumes might be seen in Far Out of The Money Put which might keep you wondering how these people are making money. No, they aren’t for them its Cheap Insurance which will be covered in another post.
2. Not Having an Exit Plan
- Option Strategy might go your way or in opposite direction, it is very important to have an exit plan.
- Not having an exit plan keeps you take wrong decision while looking at the screen.
- Not having an exit plan can lead your trade into a loss. At times even your profit making trade can turn into a loss and take away money kept right on the table.
3. Not Covering Written Options
- Written Calls carry the risk of unlimited losses.
- Continuously writing naked index call option could give you regular income over a period of time.
- The return one gets from writing a naked call could be way beyond average but this should not be your only strategy.
- More importantly, a single loss in naked option could take away years of earning.
4. Choosing Wrong Expiration.
- Choosing the right expiration is as important as the strategy itself.
- If you choose to option with very few days to expiry there are chances that you could be exposed to gamma risk. Gamma risk is when you have written options and it is positive if you buying options.
- At the same time taking too long days to expiry could keep your capital at bay without much movement in the option leading to diminished returns.
5. Wrong Position Size
- This is more of an emotion than options trading calculation.
- When you are continuously making a profit in options trading you would tend to change your funds from loss making strategy to profit making strategy in your options trading portfolio.
- You could end up in trading position size which is too long for your trading account.
- Same is true for another way around if you are fearful you might trade very small amount of your account on your strategies. This might reduce your chance of earning.
6. Ignoring Volatility
- Implied Volatility of underlying is very important. This helps to determine the option premium.
- Most of the time new option traders only consider Current implied volatility and come to conclusion if it high or low compared to the other stock.
- Perhaps this will lead you to wrong conclusions. Because the implied volatility conclusions are meant to be taken based historical volatility history. At current volatility of a stock I might feel that the stock volatility is high. But for this particular stock, the volatility could be at all time low.
- Understanding the difference between Implied Volatility and Standard Deviation.
7. Over Trading
- This is the most common reason for losing money in the portfolio.
- After initial series of profit making trades, you are tempted to make the trade even though the trade does not qualify with your checklist of trading options.
- Seizing a right opportunity is more important than continuously trading all the time.
- Most of the time the urge to trade all the time or people those who are suffering from compulsive trading get affected with over trading.
8. Not Having a Trading Plan
- The exit plan is completely from the trading plan.
- When you are managing Greeks and trading with an option you are typically having many adjustment strategies.
- Though this is not possible in small trading accounts.
9. Leaving Option Greek for Later
- When I started off with Options Trading I was more focused on to learn how to calculate the Option Greeks.
- When I heard the name for the first time I had decided first itself that this is going to be tough and was reluctant over a long period of time.
- Once have learned option Greek now I understand the unlimited uses it has.
10. Implementing Option Strategy without Understanding
- Learning with experience is not possible in this case. It is possible but it will cost you a bomb.
- Nevertheless, do not rule out the options paper trading.
- Starting to trade the options trade without proper understanding the Options Strategy would give your inadequate results.
11. Written Option Leaving unnoticed.
- This is a crime in Options Trading.
- Leaving written option unnoticed especially if it Far Out of The Money it can cost you your whole trading account.
- Premiums at times can look lucrative and returns would be very much satisfying but it does not compensate the risk which is taken for.
12. Trading Illiquid Options or Low Volume Options
- If by mistake you have entered an illiquid stock then it would really be a task to get out of it.
- Especially if you have written an illiquid stock there are chances that you would not be able to exit for a very long period of time.
13. Leaving In The Money Option to Expiry and Get Exercised.
- We all now know how one person earned 10 Lakhs but ended up paying Rs. 24 Lakhs to his Broker.
- Getting In The Money Exercised could be very expensive.
- While most brokers are very cautious and they intimate the trader to close the position. But at times this mistakes could end up being very costly at times.
14. Not Giving Emphasis on Payoff Chart
- Payoff Chart is the best thing that an Options Trader can expect.
- Many feel very complicated with charts and they try to ignore the charts all through.
- Honestly one should start with payoff chart this gives so much more clarity which is otherwise not possible.
15. Emphasis on Probability
- While deciding your Options Trading Strategy it is important that we use Probabilities.
- Your trades based on probabilities would confirm if the risk to reward ratio which you are using are justifying your trades.
16. Over Leveraging.
- These days with the advent of technology stock brokers are giving too much of leverage to traders.
- Most of the leverage given are for intraday trading.
- You have to really understanding Is Intraday Trading really for you?
Conclusion Avoid Costly Mistakes which I Started With.
Options Trading is more Emotional Affair than Strategic or Tactical.
What brings you to Options Trading quite the more often is the reason for you to make losses.
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