Three Biggest Mistakes In Option Trading

Option trading today is more popular than ever and as markets get more volatile than usual, option trading looks to be the most promising way to profit from the markets. While participation has been increasing in the complex world of option trading, the mistakes made by option traders are also quite visible. Geyatee Deshpande shares insights on the common fallacies that option traders suffer from and also suggests how best to avoid them

- Geyatee Deshpande

There is no doubt that options offer traders and investors a number of outstanding money-making opportunities. Some market participants (speculators) can buy options and enjoy the possibility of unlimited profits with limited risk while others can employ a strategy using options that offer an extremely high probability of profit. If this is not enough to excite market participants, investors can also use options to hedge other existing stocks or even futures positions for that matter. In spite of all these possibilities that can be explored using options, it is estimated that an overwhelming majority of options traders end up losing money in the markets in the long run. This raises some questions:

What is it about option trading that causes so many traders to fail?

Should one trade-in options at all?

What can be done to avoid common mistakes while trading in options?

If such a large number of options traders make common mistakes and lose money in the markets, one can raise an additional interesting question here: can we have an edge in options trading if we identify the common mistakes that a majority of options traders make? The good news is that by isolating such common pitfalls and understanding why such common mistakes occur on a regular basis one can start avoiding them and start taking a major step towards becoming a successful option trader.

Mistake 1 Relying Solely on Market timing