7 Reasons Why The Options Trader Get it Wrong – Trading Fuel
- Options trading is generally considered by many traders in the country because it helps you fetch a good amount of profits when the stock price is rising or falling.
- Apart from the tremendous profit, there is a risk attached to it of making mistakes.
- We use the options strategy to hedge our positions in the equity market, protect our profits, and reduce our losses.
- But there are several reasons why options traders fail.
Tip#7. Reasons why the options trader gets it wrong
It is not necessary that all options traders succeed in the market.
There are a few who make mistakes and then learn from them.
The following are the main reasons why the options trader fails:
#1. Buying Out-of-the-Money (OTM) Call Options:
- All the new options traders can get attracted to buying the OTM options because they are cheap.
- But buying OTM call options is considered one of the hardest ways to make money consistently.
- All the OTM traders follow the strategy of buying at a low price and selling at a very high price.
- Following this option alone will not help you to make consistent profits.
- If you stick with this one trend, you might end up losing a lot of money.
- Instead of this, a trader should consider selling the call option on the stock that they already own in the first place.
Also Read: What is Options Trading?
#2. Trading Options without Knowledge:
- The main mistake that every trader will make while trading options is the lack of proper knowledge.
- There are several basic option terms like the Call, Put, Margin, and Premium strategies that an option trader should know before simply trying to trade the options.
- The traders should also understand the different types of options, such as historical, Greek, and implied volatility, as they are considered to be the main parameters when it comes to analyzing the options.
- Without the proper knowledge, traders incur losses in the market, and then they get discouraged.
#3. Trading Illiquid Options:
- Liquidity is something that shows how quickly one can buy or sell something without any significant price movement.
- A liquid market is considered to be one that has active buyers as well as sellers.
- For this reason, stock markets are generally considered to be more liquid than the options market for the sole reason that the traders are trading in just one stock, whereas option traders have many options contracts to choose from.
- If we consider this example, then a stock trader will simply select one stock, such as either Reliance or TCS, whereas option traders will have to choose from the different expirations and strike prices.
- It is essential to choose the options of the underlying asset that are highly liquid.
#4. Limiting to one strategy:
- For trading in options, one should not limit himself to just one strategy.
- There are a number of option trading strategies that are available, like the straddle, covered call, strangle, and so on.
- We will have to implement different types of strategies depending upon the market situation as well as the price movements.
#5. Selecting the wrong expiration date:
It is very difficult for all the new traders to choose the correct expiration date, and henceforth they will end up selecting the wrong one.
While selecting the expiration dates, the trader should consider the following parameters:
#6. Neglecting the volatility:
- Implied volatility is the measure of calculating the expected volatility for a particular stock in the market for its future prospects.
- Option traders should definitely analyze if the implied volatility of the stock is high or low, which will help us in determining the price of the option premium.
- The traders should also analyze if the premium is cheap or expensive, which will also help in selecting the option strategy that they should use when trading in the options.
- If the options are cheap, it would be better to look at the debit strategies, but if the option is relatively expensive, it would be better to go for the credit strategies.
Also Read: Is Options Trading Profitable?
#7. Ignoring the event calendar:
- In general, option prices will react when an event, such as a dividend or bonus shares, is approaching.
- Investors will make a significant move after reading about the rising value of options in the current direction.
- For example, price movements in the option at the time of the Infosys announcement tend to rise without a rise in the underlying stock.
- As a result, it is critical to keep track of the event calendar.
Other reasons for such a failure:
There are several other reasons that will make the options trade fail.
The following are the other reasons:
#1. Not having a trading plan:
- One of the most common trading mistakes is not having a unique trading plan.
Must Read: Options Trading For Beginners (A to Z Guide)
A basic trading plan should consist of the following:
#2. Not setting a stop loss:
- It is always necessary to set a stop loss while selling your options.
- When you buy or sell an option with a very high premium, it makes more sense to set a stop loss so that you can recover at least the sunk option premium.
#3. Not using the probability factor:
- It is important to use the probability strategy before placing any trades.
- This will also make us understand if there is any risk and reward that is attached.
- It is generally that the probability has no direct influence, but the main influence is the statistical chance of the price being at a particular level on the evaluation date.
The above are the main reasons that tend to make options traders fail. But failure will teach you good lessons, so you should never give up.
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