Beginning your journey towards financial freedom trading options? Not so fast. If haste makes waste it definitely applies when looking into option trading strategies.
If you have been writing covered calls for any length of time you no doubt have made mistakes. Hopefully, they have not been the kind of errors that caused you to suspend your trading; for lack of funding. Anyone who has made missteps in their trading wishes they had a time machine to go back and undo all of the terrible trades they’ve made.
Lucky for you here are three of the most common mistakes new call option sellers make, no flux capacitor needed.
#1 Selling the wrong strike price.
Many newbies who attempt writing covered calls go into this strategy like a buyer and not a seller, especially those who have traded options before. They attempt to sell a call option that is deep in the money, a strike price that is lower than the current stock price.
The large premium received oftentimes overshadows the reality that if exercised, the trade may end up being unprofitable. When selling call options as an income strategy you typically want to sell out of the money.
#2 Improper order execution.
This is a mistake directly related to the amount of time spent actually placing these orders. If you don’t know the difference between ‘buy to open’ and ‘sell to open’ you definitely should not be putting up real money. And certainly, make sure that you are looking at the calls and not the puts. Paper trading anyone?
And it is okay if you don’t know something, but make sure you are certain before you click away $500 by accident. Remember no one was born selling options, everyone had to start somewhere.
#3 Investing the rent money.
Countless first-time investors have been filled with all the excitement of their potential profits they were so sure they would achieve. To them however the profits didn’t seem like they were potential, they seemed like a guarantee.
So many people have been turned off to the idea of investing because they thought their stock trade was a lottery ticket that would instantly solve all of their problems.
Very few ever considered the fact that the trade could go against them. When it did, they had no plan because making a losing trade didn’t seem possible. This is especially painful when that losing transaction involved money that was earmarked for something necessary like a house or car payment.
In short; never invest money that you cannot afford to lose. You should always set aside money for investing. You can make money with stock and options, but remember that you will lose money at some point.
If you are diligent your gains will outweigh your losses.