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 THE ABC OF... |
ABC of...
5 tips to avoid losses
CS journalists
1. Don't enter into an options trade too close to its expiry date. It's often tempting to trade within 30 days of an option contract's expiration but the risk is magnified due to time decay on top of the usual market fluctuations. The value of the options contract can lose or gain its value very quickly as it approaches its expiry date. Trading options much further away from expiration - such as 60 to 120 days - is generally regarded as a less risky approach to take.
2. Your trading plan should specifically outline your risk management strategy, or how you intend to manage losses in your account.
3. Be especially careful when selling uncovered (or naked) options positions because in theory your risk is unlimited.
4. Be careful trading illiquid markets because you probably won't get the price you want when entering or exiting the trade.
5. When delving into illiquid markets, it's generally preferable to only buy options.
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