Human beings are the creatures of habit. Traders have the habit of sticking to the same plan even when it is not giving them the desired result. However, some habits are worthy of breaking in order to achieve your goal. One needs to be very careful while trading in options. The options traders tend to make the same mistakes repeatedly. But these mistakes could be easily avoided. Below mentioned are few mistakes one should avoid to be successful in trading options.
Mistakes to avoid
Not deciding on exit plan- While you are trading with options, you need to have a great control over the emotions. You need to have a plan chalked out before you begin trading. No matter what happens and what your emotions are, you need to stick to the plan and should not deviate from it. Planning the exit point is very much essential for you as it not only helps in minimizing the loss when the things are going bad but also helps when the trade is going good and in your way too. You should choose the upside exit point too in advance along with the downside exit point.
Other than choosing the exit point, in the case of options, it is also important to decide on the timeframe for the exit.
Making up the earlier losses by adopting doubling up strategy- In the case of options, doubling up never works for the trader. Options are derivatives and their prices do not change like the underlying stock price. Doubling up will only compound the risk. It is best if you accept the loss and move on instead of building something for a bigger catastrophe.
Taking too much time to buy back the short strategies- You should be always willing and ready to buy back the short strategies much early. People make the mistake of believing that the trade will continue to be the same when it is going in your way, but it won’t be so in all the cases. Any time the trade can just turn around the other way.
Trading the illiquid options- Whenever the trader get the quote for the option, there would a difference between asking price and bid price. Mostly, ask price and bid price do not reflect the options that are actually worth. The actual value of the options will be in the middle of ask and bid price. How far the asking price and the bid price deviates is depended on the liquidity of the option. The spread between these two prices is narrower in case of options which have high liquidity.
Illiquidity in options is more serious as you will be dealing with the illiquid stocks. Since the stock is inactive, the options will be more inactive. Ask and bid price spread will be much wider. Hence you need to keep away from trading on these options and choose only to trade the highly liquid stocks.
Do take care of the above-mentioned points to be a successful trader.