The Biggest Trading Mistakes With Options

The Biggest Trading Mistakes With Options

This is a guest post by AK of Fallible.  

False confidence in anything is dangerous. This is especially true in options trading. It’s a silent killer that leaves its victims demoralized and broke, slamming drinks at the local bar, wondering where it all went wrong…

So how does false confidence infect an option trader’s mind?

It starts when an investor first learns about the plethora of option spread trades available to him. These spreads have a bunch of cute and fancy names, making them all the more interesting at first glance.

You’ve probably heard of some of them:

Put spreads
Call spreads
Vertical spreads
Iron Condors
Iron Butterflies
Calendar Spreads
Ratio Spreads
Back Spreads
Covered Calls
Double Diagonals
And the list goes on…

The option “gurus” tend to whip up new ones year after year too, just to hold the interest of unsuspecting investors and traders.

Now we’re not going to go into the nitty gritty of what each of these are. Most of them are bullshit and don’t matter unless you’re an options market maker anyway. But that doesn’t stop average retail traders from getting sucked in.

When they first start, they get excited about figuring out what these different spread trades are. And after they can finally recite them from memory, they start to think they know something.

This is where the danger begins.

These spreads are very complex. Just knowing what they are is not enough to successfully use them. But novice traders don’t realize this. Instead, they mistake their basic understanding of options spreads as skill and start to fire off trades like mad men.

I know this because I did the same in the very beginning of my options trading career.

Sophistication and complexity do not imply an edge.

In trading the opposite is usually true. A simple process is more likely to have persistent edge than a complex process. Don’t confuse the fancy structure of these option spreads with an actual edge in the markets. Just because something is complicated, doesn’t mean it will make you more money. In fact, you may wind up losing your shirt instead…

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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.