Schaeffer’s Investment Research takes a look at option mistakes to avoid.
Whether you are getting started in options trading or preparing to diversify your strategy, Schaeffer’s Investment Research advises there are key mistakes to avoid in an effort to maximize returns.
Schaeffer’s Investment Research says a head-first approach can lead to losses.
The first problem to avoid is a failure to fully recognize the additional funds required for options trading versus stocks. Schaeffer’s Investment Research advises options trading is best embarked upon when a portfolio contains enough funds to purchase 100 shares of stock at one time. Why? Because one option is the equivalent of 100 shares. Ideally, the portfolio is a great deal more robust to help the buyer maintain a diversified investment strategy.
Several major mistakes related to options trading after getting started revolve around failure to fully articulate an investment approach, time frames, and position.
Three major don’ts according to Schaeffer’s Investment Research are:
- Not matching your options trading strategy to your outlook.
- Choosing the wrong position size.
- Failing to consider the ideal expiration date.
With adequate planning before selection options, these mistakes are easily avoided according to Schaeffer’s Investment Research. Some investors tie an options trading strategy to market examination and pick opportunities based on perceived market trends. An alternate strategy is to thoroughly examine an individual company.
Overtrading or under-trading is also easily avoided by carefully examining the initial investment in options per Schaeffer’s Investment Research. Start with a predetermined amount of money or portion of your portfolio you are able to lose and then allot a portion of that amount based on the potential return. Similarly, choosing an expiration date for options needs to match your overall plan.
Additional options trading mistakes are:
- Staying at the party too long.
- Failing to diversify as expertise grows.
- Overinvesting without liquidity.
- Failing to prepare for pivots, such as assignments.
With options trading, it is important to know when to leave Schaeffer’s Investment Research reports. This means fully articulating an exit plan based on data before trading. Pick upside and downside exit points and be prepared to leave in a specified timeframe for those points.
Additionally, it is important to stay open to new options as your expertise grows according to Schaeffer’s Investment Research. As your ability and portfolio expand, be prepared to experiment with new timing options and more when the market demands it.
Part of maintaining some flexibility is keeping a strategic portion of your options in more liquid options — typically those from larger companies. Similarly, you must also be prepared to pivot when circumstances, such as assignment, interfere with your strategy.
Further problems are related to improper research like:
- Not noticing market issues.
- Failing to use probability.
Staying on top of market trends is key to successful options trading. Examining market volatility is key in identifying ideal option investments.
Similarly, Schaeffer’s Investment Research explains, probability research is a scientific way to examine the likelihood of prices rising to a certain point by the evaluation date. This is accomplished using personal probability calculations or a probability calculator. The result is typically the statistical chance for the chosen outcome to occur.