When you are trading, you do not want to get caught up in something that could end up losing you money. However, losing money is going to happen no matter what you do. But, you can at least try and slow this down by knowing how to do options trading so that you are not getting yourself in deeper than you can handle. There are times that you will not want to trade because if you trade in certain situations, then you are risking your position and potentially set yourself back to a
place that you are not going to be able to recover from easily.
- First, try and make sure that you steer clear of the OTM options.
As we mentioned earlier, OTM can have some serious consequences if you decide to work with this strategy. Using this strategy from time to time is not going to harm you, however, you will want to try and avoid buying any OTM options in a large quantity.
- Avoid buying any low priced options.
Just because the option is “cheaper” might mean it is not best for you. The cheaper options could end up being the options that you need to hold on to for an extended period of time because it is the one option that you are unable to get rid of. No one is going to want to buy it if the stock is down and he or she is not able to make a profit off of it.
- You are not going to want to hold any positions with one particular option after the underlying company’s earnings have been announced or if there are any planned news events.
It is best to release these options at least one week before the event is going to happen. This happens to be a good idea because you will never know what their announcements are going to cause the market to do.
- If you are just starting out, then you need to avoid trying any strategies that are meant for more advanced traders.
This is not to say you will not be able to do these strategies later on when you have gained more experience, it just means you are going to start out on your level and work your way up. By trying to start out with a strategy that is above your level, then you risk the possibility of getting
into something you are unsure of which exit strategy to use because the strategy you used is not something you are experienced in.
- When expiration week approaches, it is best that you do not hold on to any of your options.
By holding onto these options, you are required to pay out the commission because you are holding onto the option still. Mark down any expiration dates and when the expiration date approaches, release your option and either take your profit or cut your losses. Once the expiration has passed, you can always pick the option back up.
- Do not short on the naked options.
In doing this, you are exposing yourself to unlimited risks that might work against you and cause you to lose money being that you are going to have to put out money no matter what the price is, and there is no way for you to get out of it.
- If you are buying something simply because of the money that it can potentially make you, then you do not need to be buying that stock.
It is usually when a trade is doing well; the greed can set in therefore making it harder for you to close your position because you are scared that you are going to lose on any additional upside. Or, if the stock is going down, you can end up not wanting to admit defeat, therefore, holding onto a stock even if the profits dwindle and your losses begin to build.