Avoid this common mistake in options trading
We all appreciate that options trading is a more complicated investment as opposed to buying and selling stock. In addition to being accurate about the course of the move, you have to be precise about the timing. Compared to stocks, options are also predisposed to being less liquid, meaning that trading in them entails bigger spreads between the ask and bid prices. This will escalate your costs. When used correctly, options allow one to take superior control over the rewards and risks depending on their anticipations for the stock.
However, most new traders in options trading make a common mistake that can hinder that is associated with options: limiting themselves to purchasing out-of-the-money (OTM) calls.
Is it a good place to start?
For most new options traders, purchasing OTM appears to be a good place to start because it corresponds to the patterns one follows as an equity trader. You simply purchase a call option and wait to see if you might choose a winner. OTM option is a well-liked selection with new options traders as they are normally quite cheap
Although you can make some money from this strategy while feeling safe, limiting yourself to this leads to consistent loss of money and very limited learning.
What is wrong with limiting yourself to buying OTM calls?
When you purchase options, you need to be accurate about the direction and timing of the move. This simply means that if your prediction for either timing or direction is wrong, your trade can end up in an absolute loss of the paid option premium. If your underlying stock is not moving, your options’ time value keeps diminishing until expiration. When you buy OTM call, this is particularly true.
Sell covered calls
As a new trader in options, consider a strategy known as covered call’ to sell an OTM call on your own stock. This strategy allows you to sell the stock at the indicated price in the option. If this price goes higher than your stock’s current market price, before expiration, you can earn from stocks and you would not mind selling the stock.
Selling covered calls is a smart and relatively low-risk technique that allows you to earn income as well as be acquainted with the dynamic s of the market. It allows you to learn better because you can watch closely to see how prices react to little moves in the stock as well as how prices decay as time goes by.