The number one mistake in option trading is losing all your money. You’d think that was blinking obvious. You would wouldn’t you? Yet, this mistake trips a lot of new options investors.

That’s right, no introduction! I’m trying to get rapidly to the point these days, trying, I’m on the path. If I complete the ten days then I’ll write an intro and summary.

Don’t loose all your money is manifest, yet too many new options traders find themselves walking home from the track rather than sipping champagne in that limo they dreamed of.

Don’t loose money. Rule number one and two! Before you start to trade options you must be confident you’re not the patsy at table. You must know you’re going to keep your shirt on your back.You need to know yourself, you need a trading plan or investment strategy. You need to take small steps as there is no rush.

How to ensure you don’t loose all your money
A starter for ten.

You have to maximise your winners and minimise your losers. Cut your losses short and let your winners run. Peter Lynch felt “pulling the flowers and watering the weeds” was the number one mistake of most investors.

The two main methods for maximising your winners and minimising your losses.

1. By Dollar. A few big winners make up for a lot of small losses. You’re the high stakes gambler. Who cares about the losses, you only talk about the winners. This is the most popular form of options trading for inexperienced options traders and the reason why the number one mistake in options trading is losing all your money. Still for the calculating, experienced trader and the lucky a lot of money can be made.
Buying derivatives (options, futures, CFDs) of any kind is the closest you can come to gambling without stepping from the financial world into the gambling world. Yet it is the style the options industry is setup to cajole you in to. If you buy options then it is vital you pull up your weeds and water your flowers. There are less risky strategies for buying options, but that’s a topic for another day.
zeeco spreadsheet to come illustrating how a few big winners offsets a lot of contained losses.

2. By volume. You maximise the number of winners and minimise the number of losers. Lots of small winners with a few big losses. My preferred method. That doesn’t imply it is the better method, it simply is the right options trading method for me. You’re the insurance person. Selling speculation to the greedy and insurance to the fearful. The returns aren’t as sensational and you’ll occasionally be on the losing side of the options buyer’s cocktail party story, but this is an easier game to win. You mainly sell options.
zeeco spreadsheet to come.

For further reading check out Why do so many people lose money in commodity options? from T & K Futures and Options Inc.

Whole Series: Ten of the Biggest Mistakes in Option Trading
Next Post: Day Two You Need Speed and Direction

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1. Day Two: Ten of the Biggest Mistakes in Option Trading
2. Day Seven: Ten of the Biggest Mistakes in Option Trading
3. Day Four: Ten of the Biggest Mistakes in Option Trading
4. Day Six: Ten of the Biggest Mistakes in Option Trading
5. Day Three: Ten of the Biggest Mistakes in Option Trading
6. Day Eight: Ten of the Biggest Mistakes in Option Trading