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Top 10 Mistakes New Option Traders Make


Option trading is not something you want to do if you just fell off the turnip truck. But when used properly, options allow investors to gain better control over the risks and rewards depending on their forecast for the stock. No matter if your forecast is bullish, bearish or neutral there’s an option strategy that can be profitable if your outlook is correct.

I came across an excellent post from Brian Overby, Senior Options Analyst at TRADEKING. He outlines the top 10 mistakes that new options traders make. Here are the highlights:

 

  • Mistake 1: Starting out by buying out-of-the-money (OTM) call options
  • Mistake 2: Using an “all-purpose” strategy in all market conditions
  • Mistake 3: Not having a definite exit plan prior to expiration
  • Mistake 4: Compromising your risk tolerance to make up for past losses by “doubling up”
  • Mistake 5: Trading illiquid options
  • Mistake 6: Waiting too long to buy back your short options
  • Mistake 7: Failing to factor earnings or dividend payment dates into your options strategy
  • Mistake 8: Not knowing what to do if you’re assigned early
  • Mistake 9: Legging into spread trades
  • Mistake 10: Failing to use index options for neutral trades

 

You can read the full article here. Highly recommended.

 

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