Option traders have less obligations than typical stock traders. As a beginner option trader, it is crucial that you understand how your duties will differ in the capital market. The best places to buy stocks online will not enhance your experience with options. When trading options, you are not required to buy or sell. Instead, you simply have the ability to trade two types of stock options: puts and calls. New option traders like yourself get excited about the benefits option traders receive. Many let their excitement get the best of them, and end up losing more than they profit. To refrain from joining the unsuccessful, read on and learn about the top beginner option traders mistakes to avoid.
Starting Too Big
The first mistake most beginner option traders make is starting too big. While the phrase “go big or go home” may have worked in your favor in the past, it will not work in the option trading market. Begin trading with smaller contract positions. The amount of capital you invest is meaningless if you do not know what to do with it. By starting out small, you can get the hang of option trading. Then, when you have enough experience to start selling more contracts, you will profit. Sell a small number of shares at a time to begin your option trading journey on the right foot.
Using Only One Strategy
Another commonly made mistake most new option traders make is using just one strategy. Typically, option traders start out by trading long and short. While this strategy may find you success, it should not be the only tactic you use. Investors who continue trading options the same way for long periods of time do not profit as much as those who implement a variety of strategies. Option trading provides you with so many creative strategy choices. You have far more possible techniques than you would with stock trading. You can learn where to invest in stocks somewhat easily, learning how to implement the right option trading strategies takes time. Do your homework and then use the possible techniques to the best of your ability. As a beginner, start with what works for you while simultaneously learning new strategies. Then, you will avoid this common mistake new option traders make.
Poor Expiration Date Decision
New option traders also fail to realize the power of expiration. Although you have numerous options for your expiration date, they are not all created equally. To choose the best expiration date for you, you need to have an outlook first. Base your expiration date off of your outlook. Ask yourself how long you think the trade will take. Ponder whether you will profit more from holding the trade throughout a stock split or not. Consider liquidity. To succeed as a beginner option trader, do not make a rash decision on your expiration date.
Thinking Cheaper Is Better
Many beginner option traders lose out by buying out-of-the-money. In buying out-of-the-money, you are keeping an option’s premium cheap. Many new investors opt for this strategy when they are advised not to go too big. While you still should not over-leverage, choosing an out-of-the-money option also does not present high profits. Rather, such investments present higher risks because they are less predictable. Less predictability can result in surprising losses. Even with portfolio management best practices, recording losses will not be an uplifting task. Aim to make smart decisions, not necessarily cheap decisions, when getting involved with option trading.
Doubling Up To Make Up For Losses
Finally, refrain from doubling up to make up for losses as an option trader. When investors like yourself begin option trading, they struggle with losing and jump into trying to catch up. They do so through doubling up in an attempt to lower their per-contract cost basis. While this can occur through doubling up, it usually does not. Instead, new option traders end up compounding their risk. Rather than trying to fix issues that have already effected you and your capital, close unsuccessful trades. Once you learn when to close trades, you take one step closer toward transforming from a beginner option trader to a successful one.
As you enter the option trading market, you gain numerous profitable opportunities. However, you cannot take advantage of such opportunities until you know the mistakes to avoid. Firstly, start out small and then increase the number of shares you sell as you grow in the market. Teach yourself about the different strategies that other investors profit off of. Take the time to plan out when the best expiration date will be for you. Understand that cheaper is not always better. Lastly, keep your head on your shoulders when you acquire a lot of losses and refrain from doubling up to make up for them. Now, you know how to avoid the most common mistakes beginner option traders make.