Mistakes to avoid while trading in Options :-

1. Trading Options without Knowledge:

  • The first mistake that every novice trader makes while trading in options is lack t.
  • Trading in options is quite difficult without having proper knowledge of it.
  • There are many basic options terms like call, put, premium, margin, strategies that an option trader should know before jumping to trading in options.
  • They should also know about different types of options, greeks, historic, and implied volatility as they are important parameters when it comes to analyzing the options.
  • Without gaining knowledge traders may incur losses in the market and they get discouraged.2. Buying Out-of-the-Money (OTM) Call Options:

2. Buying Out-of-the-Money (OTM) Call Options:

  • New options traders get attracted to buy OTM options as they are cheap but buying OTM call options are one of the hardest ways to make money consistently.
  • Those who buy OTM call options follow the strategy of buying at low and selling at a higher price.
  • But limiting to this strategy will not help you in making profits consistently.

3. Trading Illiquid Options:

  • Liquidity refers to how quickly one can buy or sell something without a significant price movement.
  • A liquid market is the one that has active buyers and sellers.
  • Stock markets are usually more liquid than option markets as the traders are trading in just one stock whereas the option traders have many options contracts to choose from.
  • For example, stock traders will just need to select Reliance stock to trade, but options traders have to choose from different expirations and strike prices.
  • Also one should try to choose options of the underlying assets that are liquid.4. Limiting to one Strategy:

4. Limiting to one Strategy:

  • As we have discussed above, the option traders should not limit to one strategy when it comes to trading in the options.
  • There are a number of options trading strategies available like covered call, straddle, and strangle and so on.
  • Depending on the market situation and price movement, the option traders should try to implement different types of strategies.

5. Selecting the wrong Expiration date:

  • It’s usually difficult for the novice traders to choose the expiration date and they end up selecting the wrong one.
  • When selecting the right expiration date, the option traders have to consider certain parameters.
  • Liquidity in the underlying assets, the timeframe in which the prices could move to the expected levels, results, or any corporate actions that are going to be announced by the company are some of the factors that traders should look when choosing the expiration date.

6. Neglecting Volatility:

  • Implied volatility is a measure of calculating the expected volatility for a particular stock in the market for the future.
  • Option traders should analyze if the implied volatility is low or high, which helps in determining the price of the option premium.
  • The traders should analyze if the premium is expensive or cheap that helps in selecting the option strategy that they should take when trading in options.

7. Ignoring event calendar:

  • Option prices usually react when an event is coming like dividends or bonus shares.
  • Investors tend to read the increasing value in options as a sign of a big move in its current direction.
  • For example, price movement in the option at the time of Infosys results announcement tends to raise without any a rise in the underlying stock.
  • Thus it is important to keep a track of the event calendar.
  • Above are some of the mistakes that novice options traders usually make when starting trading in the options.
  • One should remember that a successful options trader is the one who keeps learning from the mistakes they make when trading in options.

Here are some do’s and don’ts to keep in mind when trading options

Don’ts :–

  • Don’t invest more than you can afford to lose: Options trading can be high-risk and volatile, so make sure you only invest money that you can afford to lose.
  • Don’t ignore market trends and news: Stay up-to-date with market trends and news that may affect the underlying asset and your options trades.
  • Don’t hold onto losing trades: If a trade is not performing as expected, cut your losses and move on to the next trade.
  • Don’t chase returns: Avoid making impulsive trades based on short-term market trends or the desire to make quick profits.
  •  Don’t overlook transaction costs: Option trading often involves transaction costs such as commissions and bid-ask spreads, which can impact your overall returns.
  • Don’t rely on luck or intuition: Successful options trading requires a solid understanding of the market and disciplined execution of your trading plan.
  • By following these dos and don’ts, you can minimize risk and increase your chances of success in options trading.

 Here are some do’s and don’ts to keep in mind when trading options

             Don’ts :–    

  • Educate yourself: Before trading options, make sure you have a solid understanding of the underlying  asset, option pricing, and option trading strategies.
  • Start small: If you are new to options trading, start with small trades to gain experience and  confidence.
  • Use stop-loss orders: Stop-loss orders can help limit losses if the trade moves against you.
  • Have a trading plan: Develop a clear trading plan that includes your goals, risk management strategies, and exit points.
  • Stay disciplined: Stick to your trading plan and avoid making emotional decisions based on fear or  greed.
  • Practice risk management: Use risk management strategies such as diversification and position sizing to         manage your overall risk exposure.

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