9 Easy Ways to Lose Money in Options Trading
Here are 9 easiest ways to deplete your trading portfolio.
If you're new to options trading, getting started can be a bit of a challenge. There are many things that can trip up even the most experienced traders, and it's important to know what those pitfalls are so that you don't fall into them yourself. In this article,
I'll cover nine ways beginners often lose money in options trading. By avoiding these mistakes and following the advice outlined below, you should be able to avoid losing money and instead start making profits right away!
1. Not Having a Trading Plan
Your trading plan is the blueprint for your success. Without one, you're flying blind as you try to make money in the markets.
A trading plan is much more than a list of strategies or advice from someone who's been successful in the past. A good trading plan includes details about your time frame, risk tolerance, and capital allocation strategy—the things that will help you succeed in the long term even if there are bumps along the way.
It also contains information about how you'll handle those inevitable bumps: how stuck with money? How tight with stops? What's your exit strategy? These questions should be answered before entering any trade so that no matter what happens during execution or after, they're accounted for in advance.
2. Forgetting to Check the Greeks
When you are trading options, it is important that you always check the Greeks. The Greeks refer to a mathematical value that tells traders whether or not they will suffer from time decay or volatility in their positions. In other words, it shows how much money an option will lose (or gain) at expiration due to changes in price movement and time value decay.
If you are entering an options trade and do not check these values before placing your trade order, then your options might lose more than what was expected due to unfavorable price movements or changing interest rates over time
3. Avoiding Volatility
Volatility is the most important factor in options trading. It can be used to your advantage, or it can cost you money. In order to avoid volatility and its associated costs, make sure you understand how volatility works in options trading:
Volatility is a measurement of how much the price of an asset fluctuates over time. The higher the percentage change in price over a specific period of time (usually one day), the greater that instrument's volatility. For example, an equity index fund might have a daily range of 0%–1%.
That means if yesterday's close was $100 per share, today's open could be anywhere between $99–101 per share—a gain or loss of 1%. On the other hand, gold stocks often have daily ranges closer to 5%–10%. If we assume that yesterday's close was $1,000 per ounce and today's open is $1,050 per ounce (an increase in value), then we can reasonably expect gold stocks' prices to rise by 4%–5%.
4. Underestimating Trade Setup Time
The importance of trade setup time
While it's important to remain aware of the time sensitivity of your trades, you shouldn't ignore the market action that occurs in between the opening and closing bell. These are often referred to as "setup times," and they could make all the difference in your success or failure as an options trader.
It's a good idea for novice traders to familiarize themselves with this concept before diving headfirst into a stock option contract—but even experienced traders can benefit from making better use of these windows of opportunity!
What is trade setup time?
A trade setup is what happens between the opening bell on one side (the bid price) and another side (the ask price). This period is also called "price discovery" because it helps determine where prices land at certain points during trading hours.
As such, there will often be times when prices jump up or down significantly due to news events that affect supply/demand dynamics among buyers/sellers—and if you're not paying attention while they're happening, then you could miss out on making quick profits by executing trades based off those movements.
5. Chasing Price Without a Trade Setup
A trade setup is a set of conditions that you need to see before entering a trade. Many times, traders will enter trades without considering their options trading strategy and the market conditions. This is a common mistake and can lead to losses in your account.
A good example would be if you are waiting for price to reach $100 before entering your bullish call spread trade, but when it does reach this level, there’s no volume behind it and so your position is not filled by the exchange because there aren't enough buyers or sellers at that price point.
6. Jumping into Trades Without an Edge
The importance of having an edge in trading cannot be stressed enough. The most successful traders have built their success upon a strong understanding of how markets work and how patterns repeat. They know when to take action based on this knowledge, which is what gives them the edge that can lead to long-term profitability.
To put it simply: You want to get into trades where you know why you’re buying or selling, not just because “it's going up!”
There are several ways to achieve this kind of insight; some traders rely on fundamental analysis while others use technical analysis or other methods such as candlestick patterns or Elliott Wave Theory (EWT). Whatever method(s) you choose, be sure that they provide value at each stage of your trading process: from entering positions all the way through closing out existing ones. If something doesn't make sense according to your strategy—if there isn't an edge—don't trade it!
7. Not Knowing Your Time Frame or Market Bias
Not knowing your time frame is another common mistake that many traders make when it comes to options trading. You need to know how long you are willing to hold a position and what the expiration date is for that particular option.
Doing this will help you avoid situations where you have an option that expires within a few days, but your positions do not end up working out in your favor.
Market bias is another important factor that can cause big losses if not considered properly before entering into a trade. Market bias refers to the market’s tendency toward certain types of stocks (e.g., high growth vs low growth), sectors (e.g., consumer services vs utilities), or even industries (e.g., technology).
By knowing a company’s bias as well as its overall industry, it becomes easier for investors who want to invest wisely when trading options on these companies' stocks because they know exactly where their investments are most likely headed over time based on past performance trends .
8. Breaking the Rules or Adjusting your Plan on the Fly
There are a number of scenarios where you should not make changes to your plan. If a trade is going against you and you want to change something, the first thing that should come out of your mouth is "no." If a trade goes well and you think, "Oh, I'm going to adjust my stop," again: no. And lastly, if it's working out exactly like planned and all of a sudden there's some kind of shift in the market that throws everything off course, making changes at this point will only result in more losses than necessary.
For example: You could be trading an option strategy called Iron Condor (a combination of two vertical spreads), and these spreads are designed as hedges against each other so that both lose money if one rises too much or falls too quickly. But then let's say the market moves dramatically higher because it was expecting good news about earnings for Company X—and suddenly those earnings fail to meet expectations.
The result? A big drop in shares for Company X stock—which means your Iron Condor loses money because its components were designed around protecting against losses but now they're losing even more than expected since one component has performed poorly relative to expectations while another component performed very well relative to expectations (due largely to its short strike being worth less).
9. All traders must have a trading plan and monitor the greeks, volatility, time frame and market bias to succeed in options trading.
It's very important to have a trading plan and monitor the greeks, volatility, time frame and market bias to succeed in options trading.
The trading plan should be followed. If you don't have a good reason for entering into an option trade then don't make it! When it comes down to it, no one can predict the future so you must have a solid reason for making each trade before committing capital.
Monitor the greeks: delta (the amount of money that will change based on changes in price), gamma (how much delta changes with each tick up or down), vega (how much money will change due to changes in implied volatility) and rho (how much money will change due to changes in interest rates).
These need to be monitored closely because they represent risk factors that affect your position; changing any one can drastically affect how valuable your position is at expiration or even later during its lifetime if there are no early exercises allowed by underlying stock options.*
Volatility should also be monitored closely during volatile markets conditions such as those seen during 2008-2009 when major financial institutions were failing left right center across America; these conditions resulted in dramatic swings due largely due not only because investors sold their holdings but also because many traders decided not follow through with their orders either because they thought prices would fall further -- which happened more often than not -- leading them quickly into bankruptcy court where most never got out alive...
Hopefully, you now have a better understanding of how to trade options and not lose money. Remember that trading options is about maximizing your profits and minimizing your losses. You can do this by using the right strategies and techniques at the right time. The best way to start is by having a plan in place before entering any trade so that you know exactly what your objectives are and when they are met or not met by an option price action signal.