First, you need to avoid common mistakes.
In this long-form tweet, I’ll share ‘The 3 Top Common Mistakes When Trading Options.’
I’ve made these mistakes myself over 20y+ trading options.
Avoid them & you’ll be primed to succeed☟
DISMISS IV RANK
Having no clue where IV is in its ranges is a recipe for disaster.
If you have no clue what the risk attached is to the implied vol collapsing when you go buy an option to express a directional view.
Understanding the interplay between the greeks in the option expression you choose is instrumental.
EXAMPLE
SPX drops
IV surges
People bullish buy calls – common pitfall!
These calls are at such elevated vol that even if you get the direction right.
The collapse in IV would still make you bleed and leave you profitless.
TOO SHORT-DATED
By buying too short-dated options, you are just making the odds of success lower.
Not only do you need to be correct, but you also need to be exact with your timing.
You’d instead pick something that buys you more time and allows you to be flawed with your timing.
Gives you flexibility on the margin of error and thus amplifies chances of success.
EXAMPLE
GLD pullbacks
Buy 7DTE calls
Not only must the directional move be right, but it must occur within such as short span of time.
Traders make life more complicated than it has to be.
BEWARE TO SELL
Some people are too scared to sell options, + you need a good amount of margin.
While it’s okay to collect theta, you don’t want to be the guy who collects a $100 premium, but the option explodes to $1,000.
People buy options to give themself leverage, but that leverage works against you when you sell.
So, when you get it wrong, it can multiply against you fast.
How to circumvent this? Draw a line in the sand.
I personally sell Call or Put Spreads to define my max loss.
Or, if I do sell a naked option, I give myself a mental stop of, say, 1x max premium collected.
EXAMPLE
NDX sells off, and you are a perma-bull on tech
Time to collect theta as IV higher
Externality happens, and shit hits the fan.
Now your options sold tripled in value.
Plus the margin required is eating up your purchasing power.
How do you feel about these single long-form tweets vs. the usual thread format?
Let me know in the replies!
#options #trading #guide #mistake #optionstrading #OptionStrategy #options
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