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Trading in Options: Beginners Mistakes

Option traders of every level usually commit same kind of mistakes. Especially beginners, they tend to buy and sell options very frequently and hold their portfolios for shorter time frames. Such frequent trading and shorter holding time frames can result in mistakes that can dent a beginner’s trading capital deeply. Keeping such traders in mind, following suggestions are proposed to effectively overcome option trading pitfalls.

  • Do not try to time the market, rather give time {to your trades}.
  • Buy In-the-Money-Options {ITM}
  • In other words, avoid buying Out-of-the-Money {OTM} Options.
  • Do not Stretch your Losses :
    Time is money in options trading. Option Premium Erosion is the biggest challenge when the trades involve option buying. Have a clear idea of your risk appetite and loss bearing capacity. If any trade is going against you or markets do not move and option premiums are being eroded with each passing day --- simply quit your trade. In other words, do not extend your losses. Do not hang on to your loss-making trades with an eternal hope of market revival.
  • Keep ‘Plan B’ Ready :
    Never bank on your original Plan completely. Keep other possible alternative trading strategies handy.
  • Online Trading :
    Associate yourself with a good Brokering House that provides seamless online trading platforms and cheaper brokering tariff.
  • Money is made by sitting, not trading: This is more so in option trading.
  • Avoid Emotional Trading :
    In options trading it is important to overcome your emotions. Have clear-cut trading plan such as when to book out, duration of investment, etc. One should not track market movement on any particular day and react to it; rather should have a fixed reaction to their movement on any given day.
  • Hedge your Trades :
    In today’s manipulative market scenarios, trading without hedging is like committing suicide. Beginners should learn different kinds of hedging setups; pursue useful option courses like Option Tamer; and possess other useful Niftystrategies that will be useful to tackle volatile markets.
  • Explore Different Kinds of Spreads :
    Learning spreads will be both interesting and at the same time Lucrative. Use of spreads at the right time maximizes profits and allows peace of mind.
  • Trade in Liquid Options only
  • Capital and Time Frame :
    Trading capital in most of the instances dictates the nature of trades we can initiate. Less capital may hamper us from having many open positions and can hold us back from implementing a variety of different strategies. So ensure capital adequacy and maximize your profit quotient. Timeframe is another factor that can affect profitability. Capital, Timeframe and Trading Strategies should be in harmony and jell well in attaining the desired result of profit booking.
  • Patience is a Golden Virtue :
    Option beginners tend to overtrade. To the extent, in some cases, good profits will become significant losses. Beginners generally realize this fact the hard way that frequent trading definitely affects overall profitability in the long run.
  • Trying to Make Up Past Losses :
    Beginners usually tend to double the quantity of their trade after suffering initial loss in a bid to cover up their initial loss and in the process become nervous and give in to emotional trading and pile up Huge losses.

The price of discipline is less than the pain of regret. Beginners of options trading should spend some time paper trading their ideas first before initiating real trades. Failing to Plan is planning to Fail. They can fare exceptionally well in options trading once they gain a grip on the topics/points discussed above.

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