5 Rookie Mistakes Most Traders Make – And How To Avoid Them

Here are five rookie trading mistakes I continually discuss with Options360 members through daily alerts and our weekly webinar calls.

1) Buying “Lottery” Tickets

Too often, new traders opt for buying way out-of-the-money options as they are attracted by their low notional dollar amount. They perceive them as “bargains” and a good way to gain the leverage of options. But the low cost doesn’t mean they are “cheap.” In fact, out-of-the-money options usually have a higher implied volatility than those closer to the money (near the underlying stock price) and are therefore “expensive” in relative terms.

Out-of-the-money options also come with a much lower delta, meaning it will take a much larger price move in the underlying shares to cause an increase in the value of the option. The probability they will deliver a profit diminishes the further out-of-the-money you go. Remember, something like 80% of all options expire worthless.

Once in a while it’s OK to make a risky bet if it’s a calculated one, such as there might be a takeover or news event that will catapult a stock higher. But for your bread-and-butter trading, it’s best to stick to strikes that are near the money (close to the underlying price).

See the other four rookie mistakes traders make here.

This post appeared first on Option Sensei.

Category: Options Trading