Option Traders:Avoid this mistake Part-I

In this article I’ve analyzed  common option trading mistakes. Options are by nature a more complex than simply buying and selling stocks. For example, when you buy options, not only do you have to be right about the direction of the move, you also have to be right about the timing.Also, options tend to be less liquid than stocks. So trading them may involve larger spreads between the bid and ask prices, which will increase your costs. Finally, the value of an option is made of many variables, including the price of the underlying stock or index, its volatility, its dividends (if any), changing interest rates, and as with any market, supply and demand.Option trading is not something you want to do if you just fell off the turnip truck. But when used properly, options allow investors to gain better control over the risks and rewards depending on their forecast for the stock. No matter if your forecast is bullish, bearish or neutral there’s an option strategy that can be profitable if your outlook is correct.

Mistake 1: Starting out by buying out-of-the-money (OTM) call options

It seems like a good place to start: buy a call option and see if you can pick a winner. Buying calls may feel safe because it matches the pattern you’re used to following as an equity trader: buy low, sell high. Many veteran equities traders began and learned to profit in the same way.
However, buying OTM calls outright is one of the hardest ways to make money consistently in the options world. If you limit yourself to this strategy, you may find yourself losing money consistently and not learning very much in the process. Consider jump-starting your options education by learning a few other strategies, and improve your potential to earn solid returns as you build your knowledge.

What’s wrong with just buying calls?

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