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5 Options Trading Mistakes To Avoid


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  • 5 Options Trading Mistakes To Avoid

    So many options traders have lost their shirts in options trading that almost all investment advisors would advise you against taking a dip into it. However, options trading continues to be one of the most powerful money making method available to the masses with its leverage and multitude of multi-directional options trading. Its leverage can quickly build a fortune from a very small fund and its multi-directional options strategies can help greatly increase one's chances of winning.

    Mistake 1: Always Buy It Cheap

    Most stock-traders-turned-options-traders or housewife-turned-options-traders failed to understand that the options market isn't exactly a market where you always buy what's cheap. In options trading, "cheap" can be very expensive especially when you are in the habit of throwing all your money into one trade. Many beginners look at an options chain and ask themselves, "Why should I buy the $3.00 option when there is one that's only $0.30 further out of the money?". Well, the problem with out of the money options is that if the stock does not exceed the strike price of those out of the money options, you lose all your money put into that trade! That's right, all of it! As such, even if the stock does go in the direction of your prediction, you can still lose all your money if it didn't move strong enough to exceed the strike price of the options you bought. As such, "cheap" options can be very expensive. If you intend to buy cheap out of the money options in order to speculate on a strong move by the underlying stock, please use only money you can afford to lose.

    Mistake 2: Putting All Your Money In One Trade

    This is a common mistake made by stock traders turned options traders. Stock traders aim to be fully invested at all times in order to maximize return on capital. Most retail stock traders with limited budget will tend to put all their money into that one hot stock. If the trade works out, all of the capital is utilized for profit making and if the trade does not work out in the short term, they simply hold on to it until the stock performs. However, when they do the same thing in options trading, especially outright call or put options buying, they frequently lose all their money in one go because options do not give you the time to hold on to a wrong trade forever. Options expires and take all your money with it if you buy call options on a falling stock or put options on a rallying stock. Due to the possibility of a full loss on any one trade, you must never put all your money into any one trade. In fact, you should always use only money you can afford to lose, again.

    Mistake 3: Trading "Magic" Options Strategies

    There are many options strategies such as the "Covered Call" and the "Iron Condor Spread" which has been touted for decades to be almost magical sure-win options strategies. However, the experience of beginners who performed these strategies without thorough understanding has been less than ideal. There is no such thing as an options strategy that is "sure-win". All options strategies profit only when the underlying stock performs in a certain way. For instance, Iron Condor Spreads only profit when the underlying stock remains within a fixed predetermined price range but lose money quickly in trending markets. As such, do not trust anyone who says an options strategy is sure-win because there is simply no such thing.

    Mistake 4: Trading "Magic" Indicators

    In this age of complex quantitative calculations and technical indicators, a lot of beginners waste time and money looking for and trading that one "Magic" technical indicator that will allow them to win all the time. Sadly, after decades of computer calculations and thousands of technical indicators, there is no one magical technical indicator that will allow you to predict stock movement and win 100% of the time. In the end, trading is all about making more wins than losses rather than trying to win without ever losing. Ironically, it is those who are always looking for that sure win formula that loses most of the time.

    Mistake 5: Looking For That One "Magic" Newsletter

    With the growing popularity of options trading, investment newsletters specializing in options trading also grew in number. Following the recommendations of a reliable options newsletter can really help get a beginner started. However, many beginners jump from newsletter to newsletter looking for that one "Magic" newsletter that always wins. Again, this is an unrealistic expectation as there is no such thing as a newsletter that never fails. Every options newsletter follow a prescribed strategy, whether it be covered call or iron condor or outright call put plays, which profits only within specific conditions. This means that if it is a reliable options newsletter you are following, you should judge its performance over a period of months before you decide if it is worth committing real money to. Don't change newsletter everytime you hit a loss because, again, there is no 100% options strategy.

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    "Step into the arena and hold on to your hat. Don't get discouraged if you don't make 8 trillion dollars in your first month. Trading is not a get rich quick scheme. Realize that trading is a skill and just like any other skill it takes time to learn. Have convictions in your decisions in life and trading. Ignore the comments and "advice" of those that have never traded a day in their life."

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    Good KARMA and positive energy abound.

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