There are many options trading mistakes that people get stuck into their mind just because the onset sounds logical. There are many of the options trading mistakes out there, but we need to cover at least a few of them before we begin.
I’m going to teach you how to trade options for a living but first I must start out with the basics and not just jump in head first with more advanced options trading strategies. That comes later so bear with me.
Options Trading Mistakes - A List to Remember
Misconception #1:Find a commodity at record lows and buy deep out-of-the-money call options every month because one day the price will have to go up and when it does you want to be on the “profit train”.
First of all, you never buy a deep out-of-the-money option just because the current market price on the underlying commodity is at a record low. How many times have you seen a commodity make a record low, and then just keep going lower, or be at a record high and keep going higher? You have to learn to purchase the right option, at the right time, and at the right price to consistently make money trading options.
Misconception #2:If you buy a call option and the market goes up, or if you buy a put option and the market goes down, you will always make money.
Well that’s nonsense. There are several factors that make up the value of the option. Like how much time is left, or the time value of the option, how close it is to the strike price and how volatile the market is.
Misconception #3:To get rich trading options all you have to do is find and sell over-priced options.
Most options expire worthless, over 80% from what I can find out. It would seem then that people who sell options are making a killing because they only have to pay out 20% of the time. That seems logical but sometimes, the 20% they pay out is more than the 80% they collect.
What you have to do whether you buy or sell options, or a combination of both, is to find the right option at the right time, at the right price and then, you have to know how to manage the trade on top of that. We will be talking a lot about managing your trades in this course.
Misconception #4:You should never sell options because they have unlimited risk.
Nonsense! That would be like saying you should never trade futures because you have unlimited risk! You can control your risk selling options even more so than you can control your risk in the futures markets. I’m going to show you many different ways to do this. So, put away the misconception that selling options is too risky.
Misconception #5:Only very wealthy people should sell options.
Again, more nonsense and I wouldn’t be surprised if it was the options sellers that started this rumor to keep the average person out of their lucrative market. The fact is that selling an option has no more risk involved than going long or short a futures contract. Now, you might think I’m crazy for asking this, but can you tell me why anyone would say that selling an option has more risk than a buying a futures contract?
Misconception #6:Trading is always a zero sum game.
This is not true. Actually trading is a minus sum game. Now this might surprise you but there are actually more losers than winners! Have you forgotten about slippage and commissions? How about the other cost involved in trading; this course as an example, or your TNT software and data downloads. This is all part of trading and comes off the top. In other words, just to break even trading, you have to make a profit.
So it’s not that one person wins and one person loses as some people would have you believe. It’s a tough business (notice I used the word business again) but it is a business that people can make money in, and some people make very good money. Hopefully you can learn to be one of the ones who is consistently making money. I know that I’m going to teach you everything I can but it’s going to be up to you to implement it correctly.
So while there's many options trading mistakes out there, do your best to avoid these. And if you're worried that your thought process is going down the wrong road, ask me!
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* Testimonials are not a guarantee of future success. All information is for educational use only and is not investment advice. Trading financial instruments, including Stocks, Futures, Forex or Options on margin, carries a high level of risk and is not suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in any of these financial instruments you should carefully consider your investment objectives, level of experience, and risk appetite. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. The possibility exists that you could sustain losses exceeding your initial investment. You should be aware of all the risks associated with trading and seek advice from an independent financial adviser if you have any doubts. Past performance, whether actual or hypothetical, is not necessarily indicative of future results. All depictions of trades whether by video or image are for illustrative purposes only and not a recommendation to buy or sell any particular financial instrument and do not factor in trading costs in trading examples due to varying commission and fees among traders. The impact on market prices due to seasonal, market cycles or news events may already be reflected in the price. See full risk disclosure. See full risk disclosure.