Option Traders’ 5 Biggest Mistakes
This is the ‘quick and dirty’ outline of the most common reasons Option Traders can’t make money.
5) Paying High Commissions:
Time for some plain talk. If you are not option-trading using an on-line in an account, switch now! This is the ONLY way you can get rock bottom commission rates. When you discuss commission rates with your brokers (if you trade on-line, you need to call the customer service and talk to them in person, not by email or chat), you should tell them you want to pay no more than about $1.50 per side per option. Most of them will tell you the better deal is to (example) “Use our flat rate of $8.95 per trade and then trade all the options for only 65 cents each.” Unless you are an experienced trader and you always buy or sell five to ten options in each trade, you are better off just getting a ‘flat rate’ of $1.50 or even up to $3.00 per option. If you are a beginner you probably won’t be placing trades for a while with 5 or more options per trade. You will likely be making small trades while you learn and gain confidence. It will be cheaper and less confusing to just pay one low rate, like $1.50 per option now. If your broker understands that you will be trading regularly (often); they are more likely to extend a lower rate to you. The on-line brokers are very competitive and it cost them a lot of money to get new customers and keep them. A commission rate structure for options that is ‘paying too much’ while you are learning, is a ‘minimum of $7.95 per trade’— if you trade in large volumes this can work, but trading one contract or two contracts at a time and you are paying too much. Just explain this to your broker and ask him to help you make it affordable for you.
4) Bringing a ‘stock trading mentality’ to Option Trading. Not learning to use spread trading, especially vertical credit spreads; trade smart w/ strategies for non-directional passive income.
I get email from my readers regularly with some notes about what and how they trade; I enjoy reading them all. One thing I notice is how as many as 90% of the ‘new’ option traders – are still using the SAME criteria and methods they used in stock trading. The whole point of option trading is to add more and better methods to your trading. Trading stocks and trading options are ‘two different animals’ as the saying goes. The main difference is this: In stock-trading, you make money by going either ‘long’ or ‘short’ the stock. The late comedian and celebrity Will Rogers once touted the way to make money in the stock market is: “Buy low and sell high. If they don’t go up, don’t buy’em.” Trading OPTIONS is a completely different mind set than stock trading. You can make money without having to portend the amplitude and direction of an underlying stock’s price. In this way, option trade combinations (more than one option in the same trade) like the Vertical Credit Spread can be used to make money whether the underlying (stock) goes up, down. or neutral. With options, you can ‘shape’ a trade to take advantage of short-term price behavior and you don’t have to be completely right in order to make money with such a trade. With stocks, you buy or sell them so when you look for trading opportunities, you naturally try to trade with price direction. Option trading is not hard to learn, but you should realize that there are over 30 popular strategies to choose, depending on a number of factors in option price behavior. Over 80% of options expire worthless, so it’s no wonder that selling options is a popular way to make money when trading options. If you try to trade options like you traded stocks, you are not getting the right instruction.
3) Don’t Make Trades Too Large for the Account: Scared Money Never Wins. Don’t let losses run; manage your trades.
You don’t have to have a large account to begin trading options, but you must realize that whatever your account size is- will dictate a limit to your number of trades and often which strategies might work best for you. There is the old adage from poker tables: That ‘scared money never wins.’ The same applies to option trading. The only thing certain is that you will have both winning and losing trades; it’s how you manage them that will determine your success. Our culture teaches us from childhood – all the merits of persistence and optimism: These two things can take you straight to the poor house when trading. You must learn to be both a quitter and a taker; trading is a zero-sum game this way. A vital part of successful trading is being able to cut your losses, when things don’t go your way. Even when you do all the ‘right’ things to set up a trade, many of them will go bad -for reasons out of your control usually – and you have to learn cut your losses without a lot of hesitation. If you have a natural reluctance to ‘hold on’ until a trade ‘gets better’, then you will go broke slowly and painfully. The nice thing about option trading is that you can place trades (not all, but some) that move ‘slowly’ (such as selling options and slowly making steady profits a little bit at a time). Most times, these are easier to manage. It takes a lot of discipline to stay away from placing high risk ‘gun-slinger’ trades that can make big money fast (or lose it just as fast). If you are a poker player, you probably already understand this, so apply it to your option trading. The math is the same. You can play a great game in poker all night, then have one or two hands wipe you out. Stay with your plan, keep your chips by using risk management and cut those losses quickly – don’t play a poor hand just because you hope it will get better. Most times it won’t. (You knew that, right?)
2) Lack of Focus is the #2 ‘killer of profits’ in trading (stocks and options).
I get a lot of mail from readers asking me what I think about a certain system or wanting trading advice on a certain equity. It isn’t appropriate for me to give trading advice under those conditions simply because I do not know their account size, risk tolerance, strategies, and often am not familiar with the stock, ETF, or index they are using. When I watch people like Jim Cramer on CNBC, I cringe when I hear them throw out opinions off the cuff – to those that call in to the show. They give the impression that either Cramer or a combination of him and his on-air staff come as nearly to having all the answers as anyone on Earth. This is an illusion of production methods and clever word-play.
Trivia: Where did the expression ‘off the cuff’ orginate?
In one sense, it’s a straightforward story. Back in the 1870s, cheap paper led to an odd fad: Men started wearing detachable paper collars and cuffs. This served a practical purpose as men didn’t have to launder their soiled collars and cuffs in order to look presentable – they could simply remove the old ones and attach the new. Writing notes on a detachable paper cuff wasn’t unheard of. Mystery solved! – source: https://www.onehourtranslation.com/translation/blog/language-origins-cuff-remark#sthash.2akXNrBQ.dpuf
A great deal of TV commentators will speak ‘off the cuff’ especially when surprised and unprepared. A nice skilled appearance is no substitute for preparation. When was the last time you heard one of them say, “I don’t know.” ?
I get scores of email from readers who are following two or more TV channels, several blogs, stock tip sources, scores of news items, analyst and media personalities picks, and information from a myriad of websites – ALL AT ONCE! It’s great to be enthusiastic and bright enough to read and try to assimilate all that information, but most times it results in what is called “analyze to paralyze” results—- that is, information overload that is freezing and second-guessing the decision-making process. Too much information can easily dilute and even impede your learning process. Don’t try to follow all the ‘hot tips’ you see in media. Don’t try to follow 50 stocks on an expert level – at once. Develop a list of stocks, ETF’s or an index or two – with which you are familiar; add and delete from this watch list – but focus, because trying to ‘know it all’ will be the death knell of your trading. You don’t need 30 strategies in option trading. Find the few that fit your style, knowledge, risk tolerance, and account size – then practice them until you gain confidence. Think of choosing your option strategies like you would a giant food buffet; you don’t eat everything there, you select the best food for you at that moment.
And NOW the #1 Mistake:
#1: Not using the FREE trade simulator of your on-line broker to LEARN option trading.
If you are new to option trading, here is the very best advice I can offer. It won’t cost you a penny; it’s absolutely free. And you can use this 24/7 as you please. I’ve already written a description of this, here’s the link: #1 for Help to Option Traders
Thank you and good luck.
You can write to me at: Don Singletary Don@WriteThisDown.com