Some Options advices for new/ seasoned Options traders:
I thought i'll make a little write up on Options trading and mistakes we do. Please don't take this post as "belittling", i'm actually admitting my own mistakes + experiences and still learning myself. I'm not that long in Options trading (few months now) but while i do regard myself as a good trader I keep making the same mistakes. Thus I decided to write this not just for other Options traders but also myself and hopefully we all learn from our mistakes.
Feel free to reply and add to this if you have other points and experiences.
Some key points:
- Daytrade, do not hold Options for long.
Some people are good with swinging Options over days, some are even successful swinging Weekly Options over days and holding overnight but honestly most of the time it's like Russian roulette holding Options overnight. If you feel confident enough and have done so successfully many times then great, but usually it ends up in "tears". With Options losing in value over time if a stock is flat or goes against your direction (Calls/ Puts) the value of your $ can be evaporated quickly, especially in Weeklys. On top of that the general market is so schizophrenic and with so much BS going on (Europe, Greece, CopterBen/ Fed, bad/ good news, etc) every day it can gap down or gap up big. So if you do hold Options over days I'd rather recommend to do so with Monthly Calls/ Puts.
- Cut losses quick if you doubt the trade.
One of the biggest mistakes we do in Options is not cutting losses quick enough. I personally don't use stops as many times you can be kicked out of your trade just because of a stupid dip that bounces right back up, however using stops isn't a bad idea. But more importantly is to be able to get out of the trade quick if you're doubting it, better safe than sorry.
Let me give you an example of a huge mistake I did this week. After a nice $AAPL profit of $13k in 1hr on Monday, I decided to use those profits in $MA, $V + $AAPL Puts with market gapping down big on Tuesday. It was very amateurish of me to do so because I even told myself that I should probably not go in with Puts after such a big gap down and all of these 3 stocks being short-term oversold on their 30min/1hr charts. But something got ahold of my rational thought and I went in Puts anyway. I guess I assumed the market was finally rolling over and would dip more (as well as the daily charts of all of these 3 stocks were overbought and had their MACD's with a bearish cross-over). And then it happened, the market and those stocks bounced and from a little profit in those Puts that morning all of them quickly started to become losses. At first $1k, then $2k, $3k and I was still holding thinking, i might just wait it out to get out even if not with a little profit. But no, the stocks/ market just kept going up and I was too stubborn to cut my losses quickly.
So I held all of those Puts into the next day hoping that maybe the stocks would gap down/ go down again, but no it went against my direction and I was at 50%+ loss and later even more and even now I was just too stubborn to sell. In the end I was like the monkey who kept his hand in the jar trying to pull out the treat but could only get his hand out of the "trap" by letting go of the treat. I lost all of the $13k profit from Monday.
This isn't the first time it happened to me and it wasn't the first time i was stubborn but now I finally have to stop doing the same mistake over and over and hope others can learn from this.
- Don't short if the market/ stock is gapping down a lot (and vice versa).
As with the example above, I just wanted to point out that it's very amateurish to go in with Puts after the market/ stocks gap down a lot (as on Tuesday). Like I said, even told myself it wouldn't be a good idea so listen to your knowledge/ rational thinking instead of the temptation. When you see the 30min/ 1hr chart MACD very oversold with big red candles and almost about to turn, 90% of the time the stocks will bounce. This is when you listen to big ol' Warren B. and go long on panic, not short.
And vice-versa of course if the market/ stocks gap up big time and their 30min/1hr charts are way overbought.
- Don't buy Options holding over weekends.
Like I explained in the first point, you pretty much always end with a loss if you buy new Weekly Options on a Friday. You lose 2 days in premium and unless the stock really continues to go in favor of your direction quickly those Options lose value as premium is being eroded with time-decay.
- Don't be too greedy.
This is probably the most important point. Don't be too greedy. No matter how good of a trader you are, if you let greed win over you, most of the time it will end with a loss. I could probably be at $200k-$500k profit by now in these past months if I just constantly took 100-200% instead of holding Options longer to squeeze a bigger % out of it or maybe even trying to get 10, 20 baggers.
- Don't overtrade.
After a really nice trade/ profit it's just better to be happy with the result and step away from trading for the day or do only another trade. Options trading can be very addictive with such opportunities each day, each hour, 100%, 200%, 300%, 400%, 500% and more but overtrading can lead to quick losses too when you're "drunk" and hyper from your last great profit.
- Never give up after setbacks.
Even if you had a big setback or a nice big profit and then losing it again, ending flat or at loss for the week, learn from your mistakes and analyze it and do better next days/ weeks. I've had many setbacks but each time I quickly rebounded and now I just need to finally learn from some of the last mistakes I still often do as well as protect profits.
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For me i'm now at a point where I need to "grow up" in Options trading and be more constant/ consistent with profits and finally stop making the same mistakes over and over.
I hope this post was a little inspirational/ help to some of you too.
Cheers
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