This documents lists the most common mistakes made by the new Options trader. Options inherently are complex financial instruments. If the trader knows the risk and expected returns associated with the investment, they can use the instruments in their favor.
Option trading is allowed for only few stocks. You have more choices since they have attributes like expiration day and Strike Price. But on the other hand, the Options are less liquid that stocks.
Also the bid ask spread for Options can be high since they are not liquid.
Options are made of many variables, like price of the underlying stock or index, Implied volatility, market interest rate, days to expiration etc.
Time is an important factor in the world of Options. The time value of the Option is like an ice cube under the sun. As time passes, it keeps melting. It melts faster as the size decreases. In terms of Options, the time value of Option (especially Out of the money Option) decreases faster as the expiration date approaches with the rate high in the last one month of expiration.
Apart from predicting the direction of the movement of the Option, the Option trader requires to be correct about the time. I remember a trade I made of Citibank, where I had Nov 25th CALL for $24 strike. The Stock ended @$23.63 and my all calls ended worthless. The next business day the stock opened at $25.23 and ended the week at $28.17. Had I bought the Dec 2nd CALL instead of Nov 25th, I would have made $4.17 per contract. So the stock should move in the direction you anticipate in the period you anticipate for you to make money in the Options market.
1) Buying the Short Term (ST) Call Options2) Buying out-of-the-money (OTM) call options
3) Ignoring the Brokerage cost when buying Options
4) Not having an Exit Plan
5) Trading Illiquid Option
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