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Options Trading: Losing Before Winning
Most options traders were disappointed when they put on options positions expecting tosee profits quickly. In fact, almost 90% of the time, your options position would make asignificant loss before eventually profiting… if it profits at all. Does that sound likesomething you have experienced?Yes, that is a fact of options trading(http://www.optiontradingpedia.com) and a phenomena that veteran options traders like myself have learnt to accept. In fact, many of my options positions, especially single directional bias ones like thelong call, go into asdeep as 60% loss before finally rebounding into a resounding 100% profit. Yes, most beginners would have taken that loss early and missed out on the profit.What is the cause of this phenomenon? There are 3 main reasons why MOSToptions strategies go into a significant loss before profiting.First and foremost is the bid/ask spread of all the options involved in a position. Bid ask spread is the difference between the ask price and the bid price of an options contract.Retail options traders buy on the ask price and sell on the bid price. An options contractwith an ask price of $0.90 and a bid price of $0.60 has a bid ask spread of $0.30. Thismeans that if you sell the option the very moment you bought it, you incur that $0.30 lossstraight away. Options bid ask spread is significantly wide for most stocks with spreadsof $0.30 as fairly tight spreads and up to $0.50 in some cases. Only in highly liquidstocks like the QQQQ do you get spreads within $0.10. Buying out of the money optionscosting about $0.70 with a $0.20 bid ask spread could land you in as much as 30% lossthe very moment you put on the position! This is where most beginner options tradersfreak out especially when they commit the greatest sin of options trading… putting alltheir money into one trade.Secondly, none of us are stock market wizards, not even George Soros or Warren Buffett. None of us could consistently put on a trade and have the stock move exactly as predictedthe very moment it is put on (day tradingexcluded since time frames in day trading areextremely short). Like Jim Kramer said, because we are not geniuses, so we shouldalways establish a position gradually over a number of days. Yes, most of the time, sadly,the stock seem to go the other way the very moment you put on a trade. This seems to be because most options traders enter trades emotionally when the buying get hot, which isalso the point where the stock pulls back a little due to overbuying or overselling in thecase of buying put options or shortingcall options  (http://www.mastersoequity.com/call_options.htm). Now, leverage in options tradingworks both ways. If it makes money quickly in one direction, it would also loss moneyquickly in the other even if the stock merely moves against your favor slightly.Third, COMMISSIONS! Yes, most options brokers would charge in the region of $10minimum per trade for a certain number of contracts. For beginner options traders takingextremely small positions, that $20 ($10 for buying and $10 for selling) can add a
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