Common Mistakes to Avoid When Trading Options

It is possible to profit when stocks go up, sideways, or down. You can use option strategies to manage big lumps of stocks with fairly small cast outlay, protect gain, and cut losses. That sounds great, but it has a catch – you can also lose more than the whole amount you invested in a short period when trading options. So that is why it is essential to trade with caution.

Stock Market News Today – The Common Mistakes Made by Beginner Options Traders

Mistake 1: Not having a Proper Trading Plan

One of the essential first steps in avoiding trading mistakes is to have a proper trading plan. Some of the basic trading plans include, but not limited to the amount you are willing to risk per trade, your exit strategy, time to enter the trade, how to find opportunities in the market place and so on — an excellent way to test your plan is to conduct paper trades.

Mistake 2: Buying options because they are Cheap

This is not always a good idea. Usually, options with lower premiums have a strike price below or well above the market price. Unless there is a big announcement or earning reports coming up soon, it is harder to make money on this type of deals.

Mistake 3: Ignoring Volatility

It is essential to know if implied volatility (used by traders to gauge whether an option is going to be cheap or expensive in the future) is relatively low or high because it helps decide the price of the option premium. High implied volatility usually indicates a bearish market while low implied volatility signifies a bullish market.

Mistake 4: Lack of Defined Exit Plan

Sometimes, a plan doesn’t pan out. When this happens what do you do? If you don’t have an exit plan, you could leave with a massive loss. That is why you should always have an exit plan. Even when you make a profit, you could lose it if you stay in a trade for too long. So, choose your exit whether you are making profit or loss.

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Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.