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7:47 pm - Tuesday December 6, 2016

10 Tips and Truths for Successful Option Trading

| Investing | Rating: 4.5
by Numan

Household investors tend to lose at option trading. This is an unfortunate but unavoidable fact as these are sophisticated markets which require high proficiency and deep understanding as well as advance algorithms and computing power in trading.

Tips for success in trading option should be in accordance to the aforementioned truth.

#1 Limit your losses
It is very easy to adopt a double or nothing attitude at options trading. This is a mistake as the risks, at times, are highly against you. Only trade money you are willing to lose.

#2 In options high variability yields high return
An option holds a certain potential. When you hold on to an option in times of high variability the chances of that potential becoming real are increased. Think of an option to buy a certain stock at the price of 9$. If the stock price fluctuates significantly (for Ex. 4$-8$) your option will be worth more then if the stock price was very stable (for Ex. around 6$). This is due to the increased chances of the stock price crossing 9$ and the option becoming ‘in the money’.

#3 Control your emotions
Option trading requires cool heads and discipline. Trust and follow your initial analysis. Train yourself to be self-disciplined and avoid the temptation of either buying or selling before the goal you’ve previously set. During the actual trading you don’t have the luxury of carefully analyzing your next move.

#4 Look for trade volume for quick buy in and buy out
You might identify a priceless chance of buying at very low prices but remember you’ll eventually have to sell it at higher prices. Make sure trade volume is sufficient for quick trades.

#5 Trust your judgment and be wary of the judgment of others

#6 Don’t be tempted to take unnecessary risks
Some opportunities seem to be too good to be true. Successful traders develop an intuition which sometimes enables them to identify these opportunities. However, identifying one should not lead to an “All In” attitude. Taking measured and calculated risks is a must

#7 Take the time to evaluate the market at various stages
Successful traders carefully examine opening and closure in particular for signs of trends and large transactions.

#8 Don’t be quick to sell on profits or hesitant to sell on losses
Two common and well known mistakes made by investors.

#9 Technical analysis tools may be useful in short term trading
Take the time to learn them.

#10 Selling options is not a profitable strategy in the long run due to occasional high market variability which will eventually result in huge losses

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