As a beginner options trader, it is important to learn about the common mistakes that are made in order to know how to avoid them. In this video, we will discuss the top 7 option trading mistakes that new traders often make. By understanding what these mistakes are, you can take steps to prevent them from happening and improve your trading results.
Real quick guys, please hit the like and subscribe buttons below as well as comment and let me know your thoughts on this video.
Also, be sure and grab the FREE Simplified Options Strategies Trading Guide. I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management. It’s a great guide to have by your side when trading options.
Mistake #1 – Trading Illiquid Positions
You will only be able to close or roll positions at a very unfavorable price if the option you are trading is illiquid. Illiquid options will often have very low volume and wide bid/ask spreads that can eat away at your profits.
Don’t kid yourself, any spread or difference between the bid and the ask is literally money that is flushed down the toilet.
We need to target only trades with high options volume and narrow bid-ask spreads so that we are not giving away free money.
This will result in us trading only stocks and ETF’s with less than 5-10-cent wide spreads.
Mistake #2 – Trading too many underlyings
I like to have between 5 and 10 underlyings or stocks at most. Having a max of 10 forces us to pick the best opportunities. It is difficult to track fundamentals, technicals and other factors like earnings and reports with too many different underlyings on.
Positions often overlap so one trade is similar and will react the same as a trade in a different underlying. So why not just pick the best one?
It also just takes too much time when you have too many stocks at one time. And it is difficult to move quickly and get filled in volatile trading sessions.
Mistake #3 – Trading too big
Trading too big can be both a mental and financial challenge. It’s mental in the sense that you may not have the emotional control to handle large losses and it can be financially challenging because if you don’t have adequate capital to back up your trades, you will end up taking on too much risk with your investment dollars.
Focus on not blowing up with a catastrophic event. We never know when there will be a war or political event or pandemic. Every few years something happens that causes the market to drop significantly.
Even if we have uncorrelated positions. When an event happens everything suddenly becomes correlated and goes down.
We have to be able to stay in the game by not over-leveraging ourselves and using excessive amounts of margin or leverage. These are the times when we want to have cash available to invest while everyone else is getting out.
Always have about 50% of your Buying Power available when the market is average or above the historical average. Since we are trading options, we are using leverage so we can outperform the market and stocks with using much less capital.
People see the big gains and the potential and become greedy. They often don’t realize that they are going too big until it is too late and something happens and they lose everything.
That said, if the market has already been hit with a 20 or 30% downside loss then we are probably safe having 70 or 80% on at that time with more positions leaning long.
Mistake #4 – Closing winning trades too early
If your average win is $50 but your average loss is $400 then you need to win 7 out of 8 times just to break even. That is a 87.5% winning percentage. That is tough to do just to break even.
Taking profits early will boost your win rate but at a cost. It will also eat up commissions.
Figure out for yourself what win rate, max loss and max win you want to shoot for. I like to have an average win of around 66% or higher which seems reasonable. This would equate to a breakeven of $100 for wins and $300 for losses.
Be patient and allow winning trades to work to keep more premium.
Mistake #5 – Using the incorrect strategy and not analyzing volatility
We need to make sure that the strategy we are using is appropriate for our outlook and risk profile. The wrong strategy can cost us dearly.
We want to sell options in high volatility. So selling puts, calls and strangles in high IV is best. If the market is hit hard then it may be an appropriate time to buy LEAPS with low-priced quality stocks that have already been hit hard and will bounce back.
Mistake #6 – Trying to fix broken trades
Accept losing trades and move on. Don’t waste margin, time and commissions. Move on.
Human nature is to not admit defeat. At some point, however, there is a very low probability of profit and at that point it is both a waste of time and capital.
Know when to take losses and move on when the probability of profit gets very low.
Mistake #7 – Not having an exit strategy
It is critical to know when you will manage a trade and roll as well as close a trade and move on. Plan your exit strategy. This applies to both profitable and losing trades. If you don’t have a “set in stone” exit plan then you may likely make costly decisions in the heat of the moment when a trade moves against you.
The exact point at which you decide to close a trade, get out or roll is really up to you. There are several different thoughts, systems and strategies for managing and closing trades. Find out what you are comfortable with and how you will want to manage trades.
We do have the FREE Simplified Options Strategies Trading Guide that outlines our trade management system. So be sure and grab that! I’ll put a link down below. It covers the different options strategies setups, how and when to put them on, max profits, and trade management.
Alright guys, please remember to hit the like and subscribe buttons below as well as comment and let me know what mistakes you may be making as well as what is working for you!
Thanks for watching and see you in the next one!