Options Trading Strategies: Options Trading Advanced Strategies and Techniques in the Market Environment by Matthew Morris

Author:Matthew Morris [Morris, Matthew]
Language: eng
Format: azw3
Published: 2020-08-07T16:00:00+00:00

Chapter 13: Option Trading Mistakes to Avoid

O ption trading can be challenging to master, and you may find yourself going through a frustrating period of trial and error in an attempt to get it right. This is especially likely if you are completely new to options trading, and attempt to view it from the eyes of regular stock market trading. Options trading follow its own unique set of rules, and not being conversant with these rules is what can lead you to make some time consuming and costly mistakes.

To save you time, these are the mistakes you are likely to make before getting it right. With this information, you can avoid these mistakes and fast track successful option trading.

Mistake #1 – Applying One Strategy in Every Situation

Different market conditions require differing unique approaches. Sometimes, an option trader will apply the one strategy that they are aware of to every option purchase that they make. This can lead to loss of money and disaster on your portfolio. Buying spreads should be considered as a solution to this problem, and they will fix the mistake. Buying spreads allow you to trade effectively in a range of market conditions. A spread means that you purchase a myriad of options and adopt different strategies to suit these options. In a way, you could say that you are effectively spreading your risk. When you buy several spreads, you adopt a ‘long spread’ position.

The long spread position has two options – a high-cost option which is bought and a low-cost option which is sold. These options will have some conditions for security, expiration and type of options, which will make it easier to choose the strategy. You can then evaluate the values to make a decision as to when to hold on to your options, or when to sell them. The only thing to watch out for is that using a spread approach may lead to multiple options traded that incur multiple commissions, which may mean higher expenses.

Mistake #2 – Buying Out Of the Money Call Options from the Onset

Most people attempt new ways to invest with a little trepidation because they want to avoid loss, especially a large loss. For that reason, when some opt for option trading, they start off with buying call options, as this allows for “testing the waters.” It allows for buying low and selling high. Unfortunately, this method is not consistent in the long run and may lead to losing money. Therefore, one needs to consider at least one other strategy to go hand in hand with call options when purchasing. The reason for this is when you by options, you need to be right about a direction of the move and the timing. A mistake on either of these factors may result in completely losing the option premium paid.

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