Top Reasons Why Beginners Lose Money

Trading options is not easy…… It takes time to learn the various techniques and get a feel for how options work, but its not any different than trading stocks and to be successful you have to put in the time.  I am going to cover the TOP 5 Reasons why beginners fail to make money or lose money when trading the basic option strategies.

Top Reasons

1. Buy Options TOO Far OTM:  When you do this, you are throwing away your money!!  OTM options are so cheap because they have a very small probability of making money by the time expiration rolls around.  If the underlying only moves by $5 a month, then you shouldn’t be buying options that are $20 or even $15 OTM.
2. Get Rid of Winners & Keep Losers:  Traders who are new to options/stock trading tend to hold onto loosing position too long, thinking that things will turn around.  Sometimes that may happen, but most of the time they don’t and the trader ends up taking a bigger loss.  On the other hand, when a position shows a hint of profit, traders tend to pulls the trigger too soon and close the position.  Large losses coupled with small profits are not a good combination and this is why you need a trading plan with entry and exit criteria.
3. Take on RISKY Positions:  When you only sell call or put options, you are exposing yourself to unlimited risk.  Selling options to bring in premium (credit) may work for 1, 2 or even 3 months, but the day the market reverses course, your position could be heavily underwater with large losses.  So DON’T expose yourself to unlimited risk.  Use advanced techniques such as vertical spreads, etc to always cover your positional risk.
4. Bad Adjustments:  There is NO free lunch in trading!!  When you start to adjust your position into something else by buying or selling more options, you are exposing yourself to additional risk.  Your adjustment make work or may not, but make sure that you understand you positional risk after any adjustment so there are no surprises!!
5. Lack of Education:  Before you even think about trading, make sure that you understand the basics.  Then, I would suggest that you open a brokerage account and paper trade with virtual money to see how options trading works and how your trading decisions pan out.  This will help you get a feel for options trading!!

Happy Trading!!