Three Common Errors That Make Options Trading Risky

There is a popular belief that trading options involves a high degree of risk, and therefore, should be avoided at all costs by conservative traders.

This, however, is not true.

While it is a fact that most options traders loose money, there are three primary reasons that once understood, can be easily avoided and lead even conservative traders to consistent profits.

The first is that most traders trade directionally. Many simply buy basic call and put options, and then hope that the market moves in their favor. This is an exceptionally risky way to trade because each trader is at the mercy of the market. If the market suddenly reverses and moves the other direction, or if a news announcement shakes up the market, the effect can be significant losses.

Secondly, most traders do not take advantage of time decay. Time decay refers to the inherent nature of options, which is to decrease in value the closer it gets to the expiration date. This means with every day that passes, the option looses value. In order to take advantage of this characteristic of options, the trader must learn to become an option seller instead of a buyer.

Finally, is that most traders do not utilize probabilities. This is a big one. All professional traders know the probability of making money in a trade before they even get in to it. They know exactly what to expect from a trade. Failing to utilize probabilities greatly increases the risk of trading options.

Minimizing the risk of options trading is essential in order to preserve trading capital. Remembering these common errors can help traders avoid significant losses and reduce the risk of options.

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