3 Tips for beginners of options trading to minimize loss
Trading in Options can be highly profitable as it is coupled with high risk. While 1 call Option of $1 may return 200% or more, same could bring similar loss if the prediction of the share price goes wrong. Trading in Options is primarily speculation of market price moves while few may use it as a hedging investment. Whatever is the intention, trading in Options always depends on a trader’s analysis and the success of a decision made out of it. In most of the scenarios, beginners face the losses as they make a few mistakes due to which losses occur.
Below are three simple tips that a beginner can easily follow to prevent losses, if not then minimize the same:
Always have a definite plan of exit: Trading in Options always point around two defining factors, one is striking price and the second is expiry date. An Options trader decides his/her moves on the movement of the stock price compared to striking price and the limit of the move towards the expiry date. Now the move of price can be at any direction in multiple ways up to the expiry date. So if you do not have an exit price move that would confirm your profit, your wait till the expiry most of the times could result in losses.
Be careful about Out-Of-The-Money trading: Out of the money (OTM) denotes to either a call option with a strike price that is higher than the market price of the trading asset or a put option with a strike price that is lower than the market price of the trading asset. In many cases buying call options at OTM brings losses. If you buy a call option at a higher striking price and the market price does not climb beyond the striking price, you would lose the money. Similarly, if you buy a put option at a lower striking price and the market goes lower than that you would not be making a profit. So make a decision after a proper analysis when trading OTM.
Do not create an all-purpose strategy – Most of the times the beginners make the mistake of trading with a single strategy while trading in Options. As has been said above, they might be making profits for buying call options at OTM for many times and they forget to explore other plans like the spread trading in Options. Sometimes trading in spreads in Options can bring constant profits too, however, the magnitude or volume may not be very high (100%, 200% and etc.) as regular options. In spread Options, regular accumulations of the spread-based profit can give a beginner time to educate in Options trading. So do not stick to a single strategy, find out different profitable and low-risk avenues of trading in Options, at least, when you are a novice.