Market fluctuations are the norm in today’s volatile global economy. Stabilization is starting to take place, which is good for investors, but a large number of people are turning to options and making money-losing mistakes along the way.
Even when the market moves in an expected direction, you can lose money on your option in the process.
1. Underestimating Time Buys
You need to buy enough time to allow the stock to go up or down. Investors just getting into options often overestimate moves and underestimate the time it can take for moves to occur. Investors, myself included, recommend adding more time to your initial estimate.
When buying an option, add 3 weeks to one month of additional time.
Making money or losing money on a trade often comes down to time. Short-term gains are great until you start bleeding money.
2. Staying in the Stock Trading Mindset
Stock trading is much different than trading options. Stocks allow you to wait years for the right time to sell, and you can continue waiting without incurring any future losses in the process. Options need to be short to help you make money. Many investors recommend getting out of an option when it has less than 30 days left.
When the option has 30 days or less left, you’ll risk a fluctuation costing you money – you can’t keep waiting with options.
Pulling out while there is a profit and going for your next option is never a bad strategy. Roll the profits into a new option and avoid the 30-day time decay.
3. Keep Expectations Realistic
Investors get greedy. You find an option, pick a position and buy as many cheap options as possible with hopes of massive returns. These massive moves often end badly for investors. Instead, pay close attention to the delta and aim to choose options with a delta of 65% or higher.
If you risk your money on a 20% delta, there is a 1 in 5 chance that you’ll actually make money. From an investment standpoint, this isn’t worth the risk if profiting means the difference between paying your rent and eating next week.
Anthony Young
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