Avoid three big mistakes in options trading

2023-10-25
Summary:

There are three major mistakes in options trading: wrong strategy selection, liquidity neglect, and stock thinking.

Options have always been a highly respected trading tool that can bring qualitative change to investors. It can not only improve investment thinking but also significantly improve investment returns. Options trading is more complex than stock trading, and new investors are often in a state of uncertainty. The money is not clear, and it is difficult to keep the money, and sometimes even at a loss, they give up options. Investors need to learn a lot and understand the correct options trading methods and concepts in order to achieve significant investment returns.

Avoid three big mistakes in options trading

Many common mistakes can be avoided if they are understood at the beginning of trading. It is surprising how many people who claim to be experienced options traders still don't understand these myths. In this article, we will discuss the three major myths that must be known before trading options.


The first mistake is choosing the wrong option strategy

Beginners in options are often attracted by the potential high returns or promoted by others as very lucrative. Single-leg options may seem simple, so they become the first choice of many new players, but this strategy is more complicated than it seems; there are many factors to consider, and the risk is not easy to control. For novice investors, it is difficult to stick to this strategy and easy to lose money. In fact, it is not impossible to buy options on one leg, but beginners must first learn a lot of options knowledge and trading experience in order to successfully use them.


The best option strategy for beginners is the covered call strategy, a bullish strategy that offers a steady income opportunity, reduces risk, and is relatively simple to operate by selling an option contract on top of the 100 positive shares held. Compared to single-leg buying options, the covered call strategy is more suitable for beginners, helping them learn options trading step by step and earn a steady income.


The second mistake is ignoring the liquidity of options

Liquidity is an important concept in options trading, which refers to how easy it is to complete a trade without affecting the price. The liquidity of options is affected by a variety of factors, including the liquidity of the stock, the volume of trading, the amount of open interest, and the characteristics of the options contract. Ignoring the liquidity of options may lead to buying at a high price and selling at a low price, increasing the transaction cost and even affecting the profit of the transaction.


In order to avoid this misunderstanding, investors should carefully consider the liquidity of options before trading them and choose options contracts with higher liquidity. Looking at a stock's trading volume, volume, and number of open interest, as well as factors such as contract expiration date and strike price, can help investors assess the liquidity of options.


Third myth: Trading options as if they were stocks

Different from stocks, options have three dimensions, including stock price, time, and volatility. Many novice investors tend to ignore the impact of time and volatility on option prices and only consider the rise and fall of the stock price. Options trading needs to take these three dimensions into account; otherwise, even if one dimension is judged correctly, it will not necessarily make money.


The way to solve this myth is to study before trading options and understand the basics of options, trading thinking, and various options strategies. Beginners should be cautious when entering the market; it is best to have experienced people to lead to avoid losses due to a lack of knowledge. Successful options trading requires in-depth research and technical analysis, as well as an understanding of the market. Investors need to choose option contracts wisely, develop risk management strategies, and adjust their positions regularly.


Options trading is a high-risk, high-reward financial activity, but to be successful, investors need to get rid of some common misconceptions, find the right entry strategy, pay attention to the liquidity of options, and understand the characteristics and risks of options. Through continuous learning and practice, you can accumulate experience to succeed in options trading. Options trading requires caution and patience, but if mastered correctly, it can be an effective investment tool to help you achieve your financial goals.


Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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