Published : August 10, 2020
Option trading is popular among traders as it helps them earn a good amount of trading profits. It helps in earning profits when the prices of stocks move up, down, or sideways. The added advantage which options trading offers is that it can be conducted with a relatively lower amount of cash reserves.
But, there is a catch when talking about options trading.
Though it seems to be a simple yet profit-making process, it can also result in traders losing more than they earn and even beyond the amount of money that was initially invested by them. Moreover, this loss can take place in a short span of time, and hence traders and investors opting for options trading need to be cautious while proceeding further.
Before finding out the mistakes that even confident traders make when trading in options, let us first, in brief, understand what options are?
Options fall under the categories of derivatives. Since they are a type of derivatives, options are securities that derive their value from the underlying assets. These underlying assets can either be stocks, commodities, currencies, or indexes, or even any other financial security.
An option contract is a financial contract where the investor has the right either to buy or sell an asset at a pre-determined price on a specific date. It offers the right to buy but definitely not an obligation to do so.
Options contracts are broadly classified as call options and put options.
A call option is an options contract where the owner has the right but not an obligation to buy a security or any other financial security at a specific price within a specific time period.
Put option are option contracts that give the contract holder the right to sell the underlying security at a strike price within the expiration date of the contract.
Here are the top 10 mistakes which the beginner options traders end up making while indulging in options trading. Learning about these mistakes will also help you trade smarter by preventing you from taking wrong actions.
In order to trade smarter, have an exit plan irrespective of the fact that whether you are buying or selling options. By having a proper exit plan in place you are able to establish a more successful options trading pattern. Have an upside as well as a downside exit plan in place. When you reach the upside positions set by you exit the trade taking your profits. Clear the position if you reach the downside stop-loss.
Trading in options can be one of the easiest ways to become wealthy but that happens only when the traders are able to abide by the basic rules of options trading. As mentioned earlier, options contracts can cause more losses than they generate profits and hence should be a part of the diversified portfolio. Avoid making the above-mentioned mistakes so that you don’t end up being trapped in trades that constantly cause losses.
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