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.
4. Ignoring the Power of Compounding Small Gains
Above, we referenced the risk in swinging for the fences with options. The less-sexy – but far more lucrative -- reality is that the best options traders grind out steady profits using a wide variety of strategies, looking to consistently earn 2% to 4% a month, with an occasional kicker from speculative bets.
Two percent per month doesn't sound like a lot, but compounded over a year, it adds up to 27%. That's more than three times the average historical return for the S&P 500 (INDEXSP:.INX). Stretch that monthly gain from 2% to 4%, and the annualized profit is on the order of 60%
The important takeaway here is not the idea of making 60% in a year, but rather the power of consistently hitting high-probability singles rather than swinging for low-probability home runs every time we step up to the plate.
Extreme risk-taking could mean that you're up 100% one month -- and down 50% the next. You do that and you're right back where you started, but with an ulcer and heart medication.
There is plenty of room for speculation with options, but to stay ahead of the game, you have to pick your spots wisely.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter