Option trading is a way for savvy investors to leverage assets and control some of the risks associated with playing the market. With options, it’s possible to profit whether stocks or going up, down, or sideways. You can use options to cut losses, protect gains, and control large chunks of stock with a relatively small cash outlay.
When starting out as an option trader, proceed with caution. Even confident traders can misjudge an opportunity and lose money. Do your research and begin with simple strategies.
We’ve assembled brief overviews of the 10 most common errors in option trading. Take a moment to review them, so you can avoid taking a costly wrong turn.
Trading OTM calls is one of the most difficult ways to make money consistently. If you’re new to options trading, consider another strategy first.Learn more
Depending on the market, you’ll want to tailor your options trading strategies. Trading the long spread is a tried-and-true approach that you should understand.Learn more
Even when an option trade is going your way, it’s crucial to have an exit plan in advance. Otherwise, how will you make the right move at the right time?Learn more
When a trade moves against you, it’s tempting to ignore your tolerance for risk and make a rash decision. Don’t. Instead, try another approach to mitigating your losses.Learn more
The biggest drawback to this strategy is that, if you initiate or adjust an option position that’s associated with low activity, you run the risk of losing money due to poor pricing.Learn more
Don’t wait until it’s too late to make your move, and don’t think that squeezing every last penny out of a trade is worthwhile. Do the right thing.Learn more
Avoiding trades with pending dividends is a commonsense approach to investing in options. Understand how the trading season impacts stock volatility and can inflate option prices.Learn more
From the beginning, keep early assignment in mind. If you think about it strategically, you won’t be caught in a bind if there’s an irrational and disruptive market event.Learn more
Trading neutral on big indices may not sound exciting but this approach can shield you from costly market volatility.Learn more
This is a common mistake among rookies and experienced traders hoping to squeeze the last few bucks out of a trade. Do not fall for it!Learn more