Options trading is fun.<\/p>\n
Options trading is sexy.<\/p>\n
And options trading can destroy your account if you don\u2019t know what you\u2019re doing.<\/p>\n
Profitable options traders understand the principles of options pricing, order entry, and market mechanics.<\/p>\n
If you fail to understand these 3 critical elements of options trading, you are not actually investing.<\/p>\n
You are gambling!<\/p>\n
So before you hit the buy button on your first options trade, carefully read through this list to make sure you are avoiding these deadly mistakes.<\/p>\n
There\u2019s a reason I know they\u2019re deadly. I\u2019ve made them all myself. Multiple times.<\/p>\n
So please, be smarter than I was!<\/p>\n
Mistake 1: Thinking the Guy on the Other Side of the Trade Is a Guy<\/strong><\/p>\n There is no such thing as easy money in options trading.<\/p>\n Let me repeat: there is no such thing as easy money in options trading.<\/p>\n As you start exploring options, you\u2019re going to be be tempted by options that are low in price.<\/p>\n Well, if the options are so cheap\u2026 why is somebody willing to sell them?<\/p>\n Remember, the guy on the other side of an options trade isn\u2019t even a guy. Or a woman.<\/p>\n It\u2019s a computerized algorithm developed by math and physics PhD\u2019s that are way smarter than you or me.<\/p>\n Those algorithms generate millions of dollars a day by selling overpriced options to overeager traders.<\/p>\n If\u00a0you think you see easy money,\u00a0it's usually a trap.<\/p>\n Mistake 2: Trading Far Out of the Money Options<\/strong><\/p>\n An option is far out of the money when its strike prices is far away from the current stock price.<\/p>\n Beginning options traders are often attracted to these options because they look cheap.<\/p>\n We\u2019ll Tesla Motors<\/strong> (TSLA) as an example.<\/p>\n Let\u2019s assume the stock is trading at $250.<\/p>\n An at-the-money call option expiring in 3 months is priced at $19 (or $1900).<\/p>\n But the $300 call is trading at just $4.<\/p>\n Many beginning traders will be more attracted to the $300 call simply because it has a lower nominal price.<\/p>\n However, far out of the money options require huge moves in short time frames to pay off.<\/p>\n So you\u2019re paying less money out of pocket, but your trade is much less likely to make money.<\/p>\n Mistake 3: Trading Illiquid Options<\/strong><\/p>\n Options on major stocks like Amazon.com<\/strong> (AMZN) and Apple<\/strong> (AAPL) tend to trade with fairly tight bid-ask spreads, and it\u2019s fairly easy to trade in and out of them at reasonable prices.<\/p>\n However, you should be very careful with options on small and mid-cap stocks.<\/p>\n They tend to have very wide spreads and do not have much trading volume.<\/p>\n So\u00a0odds are you\u2019re going to have to overpay just to get into the trade, and get underpaid on the way out.<\/p>\n And in some rare cases — particularly with very far out-of-the-money options, you may have an awful lot of trouble getting trades completed at all.<\/p>\n Last year, I bought way, way out of the money put options on\u00a0Ambarella<\/strong> (AMBA) puts and doubled my money.<\/p>\n However, there was no market for the options, and I couldn't get out at any price.<\/p>\n I went from making over 100% on the trade to losing 100%!<\/p>\n Mistake 4: Blindly Buying at the Bid and Selling at the Offer<\/strong><\/p>\n As I said earlier, algorithms generate millions of dollars a day by selling overpriced options to overeager beginners.<\/p>\n How do they do this?<\/p>\n They buy low and sell high.<\/p>\n For example, right now I\u2019m looking at April $17.50 calls on UnderArmour<\/strong> (UA).<\/p>\n The bid is $1.30 and the offer is $1.65.<\/p>\n That means the market maker will buy the option at $1.30 and sell it at $1.65.<\/p>\n That gives them a tremendous profit margin.<\/p>\n However, you don\u2019t have to accept those prices.<\/p>\n Try bidding and offering in the middle.<\/p>\n For example, you could bid $1.48 (basically the midpoint) and still get filled.<\/p>\n That would save you 17 cents, or $17 a contract.<\/p>\n On a 10-contract trade, that\u2019s $170!<\/p>\n Mistake 5: Not Double-Checking Your Orders<\/strong><\/p>\n Before you hit send on your options order, double-check it.<\/p>\n When dealing with options, you\u2019re often looking at dozens or even hundreds of small numbers on a single computer screen, and it\u2019s easy to make mistakes.<\/p>\n Make sure you selected the right the expirations and strike prices.<\/p>\n This is especially important if you\u2019re entering an order with multiple legs.<\/p>\n You may fool yourself into thinking you've found an especially attractive calendar or butterfly spread when in fact, you just got ripped off.<\/p>\n Mistake 6: Selling Options While Naked<\/strong><\/p>\n Get your mind out the gutter!<\/p>\n Selling naked options entails shorting calls or puts without any kind of hedge.<\/p>\n This is what we call \u201cpicking up pennies in front of a steamroller.\u201d<\/p>\n Let\u2019s talk about naked shorting of call options.<\/p>\n This is a bearish trade because you will make money if the stock falls.<\/p>\n But if the stock rises substantially, you\u2019ll get destroyed.<\/p>\n Let\u2019s say we want to sell nVidia<\/strong> (NVDA) June $100 calls for $6.30.<\/p>\n If NVDA is below $100 at expiration in June, I\u2019ll have made a pure profit of $6.30, or $630, per lot sold.<\/p>\n But if the stock was at $120 at expiration, the options would be worth $20 each, and I\u2019d be out $13.70, or $1370, per lot.<\/p>\n These are the types of trades where 1 bad trade can wipe out your last 10 good trades, so just don\u2019t do them.<\/p>\n Mistake 7: Ignoring the Calendar<\/strong><\/p>\n Events like earnings reports, FDA decisions, product announcements, dividend payments, conference appearances, and economic data releases can have a tremendous impact on options prices<\/p>\n So before you place a trade, be aware of what\u2019s on the calendar for the stock or ETF in question.<\/p>\n For example, if Alphabet<\/strong> (GOOGL) is about to report earnings, its options will tend to be very expensive in the days before the report.<\/p>\n Mistake 8: Not Understanding Options Pricing Basics<\/strong><\/p>\n Most options beginners think a $0.01 option is cheap and a $10.00 one is expensive.<\/p>\n The reality is not that simple.<\/p>\n An option\u2019s price is determined by a number of factors, and can\u2019t be judged by price alone.<\/p>\n If you want to stay out of trouble, at the very, very least, you should understand how implied volatility<\/a><\/strong><\/span> and theta (or time decay)<\/a><\/strong><\/span> work.<\/p>\n Mistake 9: Not Getting an Options Education<\/strong><\/p>\n As I said earlier, options trading can destroy your account if you don\u2019t know what you\u2019re doing.<\/p>\n So before you get started, take the time to learn the fundamentals of options pricing, order entry, and market mechanics.<\/p>\n They\u2019re not nearly as complex as you may think.<\/p>\n And they\u2019ll help you stop making mistakes that cost traders like you billions of dollars every year.<\/p>\n","protected":false},"excerpt":{"rendered":" Options trading is fun. Options trading is sexy. And options trading can destroy your account if you don\u2019t know what you\u2019re doing. Profitable options traders understand the principles of options pricing, order entry, and market mechanics. If you fail to understand these 3 critical elements of options trading, you are not actually investing. You are gambling! So before you hit the buy button on your first options trade, carefully read through this list to make sure you are avoiding these deadly mistakes. There\u2019s a reason I know they\u2019re deadly. I\u2019ve made them all myself. Multiple times. So please, be smarter than I was! Mistake 1: Thinking the Guy on the Other Side of the Trade Is a Guy There is no such thing as easy money in options trading. Let me repeat: there is no such thing as easy money in options trading. As you start exploring options, you\u2019re going to be be tempted by options that are low in price. Well, if the options are so cheap\u2026 why is somebody willing to sell them? Remember, the guy on the other side of an options trade isn\u2019t even a guy. Or a woman. It\u2019s a computerized algorithm developed by math and physics PhD\u2019s that are way smarter than you or me. Those algorithms generate millions of dollars a day by selling overpriced options to overeager traders. If\u00a0you think you see easy money,\u00a0it’s usually a trap. Mistake 2: Trading Far Out of the Money Options An option is far out of the money when its strike prices is far away from the current stock price. Beginning options traders are often attracted to these options because they look cheap. We\u2019ll Tesla Motors (TSLA) as an example. Let\u2019s assume the stock is trading at $250. An at-the-money call option expiring in 3 months is priced at $19 (or $1900). But the $300 call is trading at just $4. Many beginning traders will be more attracted to the $300 call simply because it has a lower nominal price. However, far out of the money options require huge moves in short time frames to pay off. So you\u2019re paying less money out of pocket, but your trade is much less likely to make money. Mistake 3: Trading Illiquid Options Options on major stocks like Amazon.com (AMZN) and Apple (AAPL) tend to trade with fairly tight bid-ask spreads, and it\u2019s fairly easy to trade in and out of them at reasonable prices. However, you should be very careful with options on small and mid-cap stocks. They tend to have very wide spreads and do not have much trading volume. So\u00a0odds are you\u2019re going to have to overpay just to get into the trade, and get underpaid on the way out. And in some rare cases — particularly with very far out-of-the-money options, you may have an awful lot of trouble getting trades completed at all. Last year, I bought way, way out of the money put options on\u00a0Ambarella (AMBA) puts and doubled my money. However, there was no market for the options, and I couldn’t get out at any price. I went from making over 100% on the trade to losing 100%! Mistake 4: Blindly Buying at the Bid and Selling at the Offer As I said earlier, algorithms generate millions of dollars a day by selling overpriced options to overeager beginners. How do they do this? They buy low and sell high. For example, right now I\u2019m looking at April $17.50 calls on UnderArmour (UA). The bid is $1.30 and the offer is $1.65. That means the market maker will buy the option at $1.30 and sell it at $1.65. That gives them a tremendous profit margin. However, you don\u2019t have to accept those prices. Try bidding and offering in the middle. For example, you could bid $1.48 (basically the midpoint) and still get filled. That would save you 17 cents, or $17 a contract. On a 10-contract trade, that\u2019s $170! Mistake 5: Not Double-Checking Your Orders Before you hit send on your options order, double-check it. When dealing with options, you\u2019re often looking at dozens or even hundreds of small numbers on a single computer screen, and it\u2019s easy to make mistakes. Make sure you selected the right the expirations and strike prices. This is especially important if you\u2019re entering an order with multiple legs. You may fool yourself into thinking you’ve found an especially attractive calendar or butterfly spread when in fact, you just got ripped off. Mistake 6: Selling Options While Naked Get your mind out the gutter! Selling naked options entails shorting calls or puts without any kind of hedge. This is what we call \u201cpicking up pennies in front of a steamroller.\u201d Let\u2019s talk about naked shorting of call options. This is a bearish trade because you will make money if the stock falls. But if the stock rises substantially, you\u2019ll get destroyed. Let\u2019s say we want to sell nVidia (NVDA) June $100 calls for $6.30. If NVDA is below $100 at expiration in June, I\u2019ll have made a pure profit of $6.30, or $630, per lot sold. But if the stock was at $120 at expiration, the options would be worth $20 each, and I\u2019d be out $13.70, or $1370, per lot. These are the types of trades where 1 bad trade can wipe out your last 10 good trades, so just don\u2019t do them. Mistake 7: Ignoring the Calendar Events like earnings reports, FDA decisions, product announcements, dividend payments, conference appearances, and economic data releases can have a tremendous impact on options prices So before you place a trade, be aware of what\u2019s on the calendar for the stock or ETF in question. For example, if Alphabet (GOOGL) is about to report earnings, its options will tend to be very expensive in the days before the report. Mistake 8: Not Understanding Options Pricing Basics Most options beginners think a $0.01 option is cheap and a $10.00 one is expensive. The reality is not that simple. An option\u2019s<\/p>\n","protected":false},"author":19,"featured_media":10711,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[542,35],"tags":[552,550,551],"class_list":["post-8645","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-free-trading-education","category-options-trading","tag-how-to-trade-options","tag-options-trade","tag-options-trading-mistakes"],"_links":{"self":[{"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/posts\/8645","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/comments?post=8645"}],"version-history":[{"count":6,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/posts\/8645\/revisions"}],"predecessor-version":[{"id":17717,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/posts\/8645\/revisions\/17717"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/media\/10711"}],"wp:attachment":[{"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/media?parent=8645"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/categories?post=8645"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.t3live.com\/wp-json\/wp\/v2\/tags?post=8645"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}