Many traders prefer to buy options, because you can’t lose more than you invest on options you buy. This level of comfort comes with a price. Theoretically, options lose time value every day and eventually expire worthless if they are out of the money. Time is a big factor for option buyers, which means that risk control is just as important for option buyers as option sellers.
A key mistake option buyers make is to hold on to their options until they expire worthless. They either take quick profits or their options expire worthless. Even if they held their options until they doubled in value or expired worthless, they would have to win on more than 50 percent of their trades to show a profit on their trading account.
Doubling your money on more than 50 percent of option buys is not an easy thing. Therefore, controlling risk means that you can’t let all your options expire worthless. Many professional traders only hold on to their options for a few days to avoid losing too much time premium. Either a trade works quickly or they get out.
A more realistic alternative might be risking 25 percent on an option premium and holding out for a 50 percent gain. These are rough numbers, but you will have to create a strategy that fits your trading style. Being realistic and being able to cut losses is very important to a profitable option buying strategy.
A key mistake option buyers make is to hold on to their options until they expire worthless. They either take quick profits or their options expire worthless. Even if they held their options until they doubled in value or expired worthless, they would have to win on more than 50 percent of their trades to show a profit on their trading account.
Doubling your money on more than 50 percent of option buys is not an easy thing. Therefore, controlling risk means that you can’t let all your options expire worthless. Many professional traders only hold on to their options for a few days to avoid losing too much time premium. Either a trade works quickly or they get out.
A more realistic alternative might be risking 25 percent on an option premium and holding out for a 50 percent gain. These are rough numbers, but you will have to create a strategy that fits your trading style. Being realistic and being able to cut losses is very important to a profitable option buying strategy.