Stock Options Trading Mistakes to Avoid
Trading stock options requires a certain level of sophistication not needed for trading in other markets. Nevertheless, many people that have previously traded stock options no longer trade because they have committed mistakes or were unaware of the risks.
Stock options offer traders a much broader scope in their trading and can be extremely profitable if errors of judgment and mistakes in trading can be avoided.
Trading Without a Trading PlanA common mistake many people who begin trading can make. Basically, trading without a plan is like driving a car blindfolded. The driver will generally end up crashing, much like the trader crashing their trading account without a plan.
The reason successful traders trade with a plan is that sticking to a well-defined and easy to implement plan decreases or eliminates emotions when engaged in trading. Emotions can wreak havoc on a person trying to make sense out of market fluctuations.
Options trading can be especially challenging without a trading plan. With the large amount of options listed on stocks, and the myriad of different options strategies which can be applied, trading stock options without a trading plan can be a recipe for disaster.
Doubling Up on a Losing PositionMany novice traders commit the mistake of adding to a losing trading position in the hope that the position will turn around and go their way. Adding to a loser, will generally lose more money, despite the chance that the trader might be correct in assuming the market will turn.
The problem with adding to a losing position can also be psychological, with the trader insisting that they are right and stubbornly holding on to the position, regardless of the amount of money the position has already cost them.
Emotion plays a large role in the stubborn nature of people who commit this glaring error of judgment. Often the error is made by a trader not following or making an exception to their own trading rules.
Legging In or Out of a Spread TradeTaking one side of a spread in the hope that the market will make the other side more affordable, or the chance to get the short side of the spread at a better price can put the option trader in the hole. This options trading mistake is known as legging into a spread.
Trading a spread position, should be just that, a spread. Buy and sell the spread as a spread and problems legging in and out of a position can be avoided. Taking one side of the spread can subject the options trader to more risk than they intended, since spreads consist of limited risk positions.
Other common mistakes that options traders often commit are riding profits into losses, waiting too long to take in short positions and trading options that have no liquidity. Trading stock options can be challenging enough without getting in one's own way.