Best Practices in Options Trading
Options trading is a not a get rich quick scheme. On the contrary, it involves taking risks and subjecting yourself to potential losses while at the same time observing and playing the market to determine where to put your money so that you get profits. You may not become a billionaire with options trading but with careful research and study, you can make really good money from it.
In a bid to help people who are interested in options trading, we want to share with you the best practices that will help you achieve success.
Investing in the stock market
If you are going to invest in the stock market, there will be a point when you are hurdling occasions of high volatility. Volatility can be viewed in two ways. It can both be an opportunity and a risk. Preparation is the name of the game that you find yourself in this situation. It is a must to change your strategy for trading accordingly. How do you keep trading on track while minimizing risks?
Learn options trading before starting
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Use appropriate trading techniques and orders
When the market is closed, you should never enter it for an options trade. When you do this, you are subjected to unexpected execution price. Always use a limit order. Enter multi-leg orders as a single trade. By doing this, you will keep commission costs low and also increase your opportunities of getting both executed at a price which is favourable for you. Always remember that ordering a trade at a price which is wider or bigger than the market price gives you a better opportunity to get an execution which is between the bid and the ask.
Keep your expectations realistic
Credit spreads have an advantage because they allow you to exchange a small amount of profit potential and gives you a chance to minimize risks. However, one must remember that if the price looks too good to be true, it probably is. Before you spend money on anything, you should understand the risks and rewards ratio clearly.
You should never make assumptions that it is good to trade with a low risk/reward ratio. Although the potential loss is small, the trade will be useless if losses are incurred most of the time. There are also strategies with high risk/reward ratios which can be profitable. However, when losses occur, they could also be significant.
Do away with your sense of security
Some people get lulled into a false sense of security when it comes to covered calls. They may have a small downside hedge but the risk can be substantial if the stock drops to a value which is higher than the option’s premium. You should have targets for your profits and losses even before you make a trade. Stop orders whenever appropriate!
It is important for everyone who is thinking of trading to learn options trading lessons first. It will help avoid unpleasant surprises which could lead to loss of money. When you know what you are doing, you have better chances of succeeding at it.
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About the Author
My name is John, I am from London and blogging since last 10 years about real estate, home improvement and finance.