9 Weeks to Better Options Trading: 5 Rookie Mistakes to Avoid Like the Plague
Veteran options trader Steve Smith identifies five pitfalls that options traders need to know about -- and avoid at all costs.
3. Failing to Understand Time Decay
Traders also commonly fail to realize that options are a wasting asset. One very important component in the price of an option is the time until expiration. So as time goes on, the value of that time decays, with a negative impact on the overall value of the option itself.
If you buy calls or puts outright, and the underlying stock moves in your direction at a slow pace, the option may not gain in value.
However, a basic understanding of option pricing and a grasp of a variety of trading strategies will allow you to offset the impact of time decay -- or even turn it to your advantage.
In future lessons, we'll be exploring strategies that will allow you to do so.
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