Trading Options — 6 sureshot Strategies to lose money consistently
Every day we hear or read about how to make consistent profits by trading options or how options can be a recurring source of income.
On top of that you have infinite amount of books and courses dedicated to ensure you that success and tips providers who claim to give 95% or even 100% sureshot calls.
Over the many years of trading options, I have seen my own trading account blown out twice before learning the whole depreciating effects of trading options.
As in real life where less than 10% will have all the money and success than the majority 90%, so is in the case of trading options also.
Infact the chance of you ever making money by trading options is less than 5%.
So, in order to save you countless amount of valuable time, let me present to you frankly 6 sureshot strategies of losing money consistently, month after month by trading options and blowing up your whole trading account.
Yes, that is correct! Trade with options like you would trade your favourite stocks and hope that it goes in your perceived direction as usual.
It is already very hard to call the direction on a stock, and on top of that without understanding and having adequate knowledge about the BIG difference between stocks and options, you are guaranteed to lose your premium consistently.
When you buy options, you would have to be right about the direction of the move as well as the timing, and the probability is very high that you would be wrong in both, making sure that your trade will result in total loss of the option premium paid.
You are sure that the stock or Index you have been following will make a good move this month. So what should you do?
You go and buy far OTM options. After all they are very cheap and you can buy them in truckloads as you are sure of a big move in the stock price.
This is another great strategy to lose your entire premium paid.
Buying OTM calls is the of the hardest ways to make money in the options trading as the premium you have paid is only for time value and that would decay very quickly if your stock doesn’t move as per your analysis or speculation.
Writing options is the ultimate way to generate consistent income, Right?
You would receive the premium from selling the option upfront and by selling ITM and ITM options; it can be as high as 25% of your invested capital.
And once the option expires worthless you get to keep the entire amount received.
Another awesome way to guarantee losing 100% and more of the initial premium received.
If the underlying asset goes against you, you will potentially face big losses and that is why seasoned option writers have a buy position in the underlying asset as well which is known as covered option writing.
Most of the option writers fail to lock in some of the premium to minimize loss.
When you see that your call or put premium has lose 30% of the buying cost, go ahead and buy some more to average and bring down your premium cost.
If another 20% down again, then average more with the hope that the value will go up somehow or the other.
Well, this will ensure that by expiry, your huge option position would be worthless thus ensuring another way of losing a huge chunk of your trading capital.
Isn’t this fun?
Look to make a huge gain on a single trade. Isn’t that great?
Why bother for those small 1–3% each returns by taking 50 different positions overtime when there is a potential on a single trade to give you 50%-200% returns right?
Good luck with that mindset
It’s easy to look back at historical data and back testing to find so many single huge gains but in reality, it is as good as throwing away your money into the river.
Your probability of finding a “needle in the haystack” is much higher than finding a stock that can make a huge move.
So, focus on making small returns and overtime you would see appreciation of your trading capital (The power of compounding)
So you made money a few times trading an awesome strategy which you believe is the Holy Grail to you progressing as a seasoned options Trader.
Well, keep using that same strategy a few more times, and that will be another grand slam strategy to keep losing money in the long run.
All strategies developed work only for a particular type of market conditions and not in all market conditions.
For example a Put Credit Spread would work well when market has a bullish Outlook and high volatility is expected but this same will not work in a non-directional, low volatility market.
Or when an underlying asset is calm and barely moving, buying OTM call or put options isn’t likely to produce good results as long as the underlying market remains flat.
So, keep learning new strategies and adapt according to the market conditions.
The idea is not to discourage you to trade options, but to give you an understanding to what you are in for if you are ill prepared for trading options.
It is not only new option traders but even seasoned traders that keep making these mistakes and start bad mouthing about options trading.
It is true that you can make money consistently by trading options but only if you have the proper knowledge, excellent money and risk management, the right strategies for different market conditions, strict discipline and constant update on the market conditions.
If you put in your due diligence and work hard and put in quality time to learn, I’m sure you would definitely make small consistent returns over time.
Majority of people in all types of careers or business as well as options trading actually win by losing.
So it is your choice whether you would want to be in that category or be on the minority side where winning means profiting something and not losing.
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Originally published at www.niftygreeks.com