The Reasons I Believe I Lose When Trading Options
When I first learned about trading options, I saw so much potential in being able to capitalize off of small movements on volatile stocks like Tesla. I did not know at the time that I was trading "naked options" in comparison to a lot of traders who use options as a hedging tool. While paper trading, I was very good at scalping options trades going in hard with 5-10 contracts generally priced in the $5.00-6.00 dollar range, I quickly learned that it was much harder to be profitable while trading 1 option at a time priced in the $1.00-2.00 range.
So, as I am approaching my first full year of trading (April marks one year), here is what I have gathered as reasons to why I generally lose hard when live trading naked options.
1. I may believe I know the next move of the underlying stock, however, the spread of the options price eats me up. Whenever I am predicting either a bull or bear move, it tends to happen 7/10 times. However, because I'm waiting for the chart pattern to fully develop to base my prediction on, I am often subjected to entering my options trade with a buy at market rather than limit ordering at a more appropriate price. Far too often are the spreads on these options between 35-50 cents. And because I know this, I tend to only buy one or two contracts. And because of this, I feel like it is necessary for me to wait for a larger move on the stock so I can extract the full profit potential. This is what ends up screwing me because if I had bought 5-10 contracts with a better delta yield, that small bull or bear move on the stock would have put me in the green a good couple hundred bucks.
2. After taking the spread I'm about to enter into consideration, I tend to take the profit as soon as I see it because of my fear of the trade going against me and stacking with commissions. With TD Ameritrade, it is 6.95 +.75 cents/contract. Buying around 2 contracts is easily a $20 commission round-trip. So if the stock makes my predicted move and it puts me in the green 45 dollars, i'll quickly take it rather than waiting until the stock reaches resistance.
3. When the trade begins to go against me, I've realized it puts me significantly into the red in comparison to being in the green when it makes my predicted move. From what I understand, this is largely in part due to time decay (theta) on the option. So, when the stock makes the move I predicted, I may be in $45 dollars profit on the option. However, when it goes against my prediction, it always seems as though my open P/L is immediately almost double what I was about to make. In this case, I'd be under almost $90 dollars (plus the $20 round-trip commission) immediately. At this point, I'd obviously have a choice to cut losses, which I usually do, or wait for a possible cover move from everyone who shorted the option (risky).
For the reasons, I've decided I will no longer be playing options. That is until I have a larger account value to be able to feel comfortable with 10 contracts at $5.00. As I've said, I'm generally right about the next move of Tesla. This is because when I first learned about options, all I did was paper trade Tesla options for around 6-7 months. I learned the in's and out's of Tesla's chart, how it normally moves in relation to volume, how it reacts to indicators, etc. But at this point, I cannot really fathom myself making $5000 options trades on my 10k account. I do hope to return to it one day, as I truly love paper trading Tesla options and making 1500-2500 a day in a couple hours. Until then, I suppose!