My favourite lines to people who want to trade options in the Futures and Options (F & O) segment of the stock market is “Most people come with a twinkle in their eye, but end up with a tear in the eye”!!
Institutional investors and professional traders use advanced formulas and multilayered strategies to not only track but have preset levels for entry and exit.
What’s the homework that we as retailers do? Many of us do it with some intuition about the direction of the stock / market and then keep hope…so what are our chances??
Derivatives get squared off – there is a winner and a loser in each transaction, so who do you think will win? The options may be defined as guessing the future and understanding quite a complex math around it – same question who will win?
The probability is that any average investor like you and me doesn’t stand a chance, you might win sometime, but eventually you will end up with loses and erosion of your capital, which I have seen practically, and is generally quite heavy.
The above points don’t mean to negate the potential winner in options trader in you. They come out of the actual practical reasons I can now understand from what I have observed. More than anything they mean to make you beware !!
Can you do the planning, the understaning, the math and the execution right? If yes, the reward is equally huge as well.
So, lets look at mistakes that an options trader makes…
- Buying Out of the Money (OTM) call and put options
- The leverage trap
- Having no exit plan
- Inadequate knowledge of various options strategies available
- Taking positions in illiquid options
- Not fully understanding the concept of proximity to expiry in case of out of money positions
- Waiting too long to buy back short positions
- Failing to account for upcoming events
- No Proper placement of trailing stop loss when in profits
- Not understanding how premium is impacted with each unit of impact of the underlying.
A very apt quote for the lot of the folks, who I have seen losing money
Author: Mr. Nirmal M Jain | Mr. Nirmal M Jain is a Co-Founder at HappyWise Financial Services. He has over 15 years of experience in the Financial Planning Sector. He has been a mentor to several people, and has helped them to understand investments, stocks, mutual funds, financial planning, personal finance and above all his favorite term “The Power Of Compounding!”.