What are they?
It’s been about a month since I started dipping my toes into the wild and frantic world of options trading. So, I thought this would be a good time for me to reflect on some of the more costly lessons I learned.
For starters, you need to know that trading options can be a lot like gambling. You can make a lot of money very quickly and you can lose it just as quickly. We recommend brushing up on options basics here.
#5 No After Hours trading
There’s not much worse than seeing some piece of news break after the market has closed. You to watch helplessly as the price of your stock declines, destroying the value of any calls on that position. Because of this, I try very hard not to get stuck holding short-term positions overnight.
#4 No Trailing Stop Loss Protection
This makes it more difficult to execute an exit strategy to limit any losses. And you need to constantly update your triggers. Part of what makes options so enticing is how fast they can move in either direction. But, because of this, you have to really babysit them to ensure your floor is protected. This can also make it harder to let go of losing positions because the gambler in me wants to let it ride rather than take a small loss and regroup.
#3 Earnings reports are factored into the price of a contract
The contract will lose significant value the moment the report is released. This requires a large movement in the price to make up for that loss. I had tried several times to profit on companies I felt would report strong earnings. Even when the earnings beat the consensus, I still lost half the value of my contract thanks to the drop in Vega, or the option’s value of volatility. The safer move seems to be selling out your position the day before the earnings are released.
#2 Contracts lose value over time
Time is a factor in the pricing of an options contract, represented by the Greek Theta. So when you buy a contract, the movement of the stock has to has to be enough to make up for the constant erosion of value due to time’s relentless march forward. This is not a linear drop either, Theta’s value declines faster as the expiration date is approached.
#1 It Works Until it Doesn’t
Multiple times I had found what initially seemed like a winning strategy that would work five or six trades in a row, then fail miserably on the next. That one failure would be enough to wipe out all or more of the gains made by the previous wins.
If you’d like to hear more about how to lose money trading options, check out Two Bulls in a China Shop as Dan and I detail our painful journey learning about the stock market.
Need more basics? Check out our knowledge center!
- How to Trade a Covered CallSince it gets discussed on the show frequently, Kyle breaks down how to trade a covered call from research to execution.
- Organigram levels up!After Organigram announces a new partnership, Dan takes a closer look at OGI and what that means for both companies going forward.
- OCGN: Experimenting with Covered CallsKyle shares his experiences trading covered calls in Ocugen, Inc. (OCGN) over the last two weeks. But will there be profits?
- 3 Bounce Back Stock Candidates Post Earnings DipWe look at three stocks that have to potential to bounce next week after their stocks fell post earnings.
- Weekly Trade Log: 02/08/21After watching GME sink like a rock, I had to step away from the markets for a bit and figure out a plan to recover.
- Weekly Trade Log: 2/01/21With the Mother of all Short Squeezes on the precipice of being Squoze, I realized some very large gains on the week
- Weekly Trade Log: 01/25/21Two savvy moves in particular erase a bad bet from the previous week and take me back into the green for the year
- Weekly Trade Log: 01/18/21Big gains from BBBY are negated when I repeat several money losing mistakes this week. When will I learn?
- Weekly Trade Log: 01/11/21The trade log is back after taking a break over the holidays. Now we finally get to see how I finished the year against the SPY!
- Weekly Trade Log: 12/21My first realized loss in a while, thanks to some emotional options trading on SPCE. An expensive lesson learned!