Mistakes Option Traders Make

“Fish see the bait, but not the hook; men see the profit, but not the peril.“
Options are both one of the greatest wealth building tools ever created and a quick way to lose all your trading capital if you over leverage and disregard the odds of your trade. Options can literally go to zero or up 1000%. They can be used to over leverage and blow up your account or can be tools for asymmetric risk management by only deploying small amounts of capital but capturing full moves in your favor.
Today let me discuss the  biggest pitfalls traders may encounter if they are not familiar with how options work.

•  New option traders buy out-of-the-money options without fully understanding how far the odds are stacked against them. If the delta is only .10 on your option then you have less than a 1 in 10 chance of your option expiring in the money. This is not trading, this is gambling, always try to be the casino and not the gambler. There are much better odds with at-the-money and in-the-money options. Save out-of-the-money for very high probability set ups Eg. Election Results

 Many new to options do not understand that you can not trade options on all stocks, only a few have liquid options. You need option trading volume to create liquidity so the options have a tight bid/ask spread. It is not wise to trade illiquid options because you can lose 10% or more of your capital

Continue Reading