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(More customer reviews)There are four basic mistakes all beginning option traders make, these are:
1)Relying solely on market timing;
2)Buying only out-of-the-money options;
3)Using strategies that are too complex; and
4)Casting too wide a net on option choices
Relying solely on market timing.
It causes failure because it ignores implied volatility. It can lead to paying far too much to purchase an option. It would be like buying a stock without knowing its P/E, or buying a car without knowing its blue book value. The way to avoid this mistake is by carefully analyzing which options are best suited to achieve your objective. Also, measure what is the current implied volatility of these options and compare it vs. the historical volatility of this option. This will give you an idea of the current valuation of this option, and whether it appears overpriced or underpriced.
Buying only out-of-the-money options.
By doing so, you ignore the probability that the option will eventually be in-the-money. It leads to buying options with little likelihood of profiting. You can get lucky once. But, such a blind strategy is a sure way to get wiped out in option trading. Instead, you should know exactly what is the probability of you making money on each option trades. This entails knowing the "Delta" of a specific option. If an option has a Delta of 20. It has a 20% chance of being in-the-money.
Using strategies that are too complex.
This leads to unfavorable risk\reward situations. First, you should determine your objective and make certain the trade you are going to make can achieve those objectives without more risk than you can handle.
Casting too wide a net.
You will spend too much time wasted looking for opportunities among illiquid options. By doing so, you will waste a lot of your potential returns on the wider bid and ask spreads of these less than liquid options. Instead, focus on securities that have actively traded options.
This book is a real eye opener on option trading.
Click Here to see more reviews about: The Four Biggest Mistakes in Option Trading (Trade Secrets Ser)
You are viewing the first edition. This title is now available in an updated 2nd EditionKaeppel beams a very bright light on 4 of the most common yet most difficult to overcome trading `dont's'. In easy-to-understand terms he breaks down the problems and offers solutions. Keep this concise little gem near you at all times while trading. You can earn big profits in options trading by avoiding the 4 most common and most costly mistakes the majority of traders make. System and software developer Jay Kaeppel shows you how to avoid common pitfalls option traders encounter that cause them to lose money in the long run. In Kaeppel's quick reading style you'll . . . > Learn to isolate the 4 most common mistakes > See why they are so common and easy to make > And discover a simple strategy to avoid these mistakes altogether Concise and to-the-point here's an action plan you can read and put into place immediately to become a more profitable trader in no time.
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