Emotions are a huge component of options trading.
It’s not mentally easy putting money at risk when you’re trading what can be a volatile investment vehicle.
So, it’s an important aspect to consider to make sure you’re making the right moves and consistently profiting.
Let’s discuss some of the most common emotions you’ll run across when trading options.
Alright, so this is a big one and I’m sure most people have heard of it.
FOMO stands for the “fear of missing out”
Every day it’s common to see one or two tickers with a massive swing either up and down.
For most people, their first instinct is to want to jump in. You’re thinking “hey, everyone else is making money on this 20% gain, I can too!”
Well, more often than not, that ship has already sailed.
Sure, you might get lucky and scalp a few percentage points. But, more than likely, you’ll end up buying at the top and be left holding bags.
Stocks that have made those massive moves are not likely to continue.
Ultimately you’re putting your money at risk in something that has already made its move and there are probably better opportunities out there.
We want to make calculated choices and FOMO is an emotion that is going to cause you to always be late to the part.
Make sure to catch yourself when you’re feeling it, pause, re-evaluate and then hit the buy or sell button.
Why do sports teams have playbooks? To make precise, well executed plays.
In the same way, no one should ever start trading without having a plan of attack, a game plan.
The easiest way to do that is to write down your set of trading rules.
For example, here are a few to get you started:
- If you double your money, take profits
- Don’t fall in love with positions
- Bankroll Management – max percent of account per position
- Don’t use leverage
- Only trading 3-4 tickers
- Days to expiration is always greater than 30 days
- Never buy puts, wait to buy the dip
- Always sell before earnings
- Don’t diamond hands unless….
You don’t have to use these, they’re just examples. But you get the point.
Pick and choose the ones based on your risk tolerance and your specific trading style.
However, the one that everyone should follow is a proper bankroll management strategy. It’s probably the most important one.
The best part? These rules don’t have to be set in stone.
As you evolve as a trader, so can your rules.
Just find what resonates well with your style right now and adjust as your risk tolerance, knowledge about options or your account value grows.
At the end of the day, while the rules are important, it’s more important to develop the habit of actually sticking to them. Set rules and stick to them!
You don’t want your emotions to control your trading, right? If you have a set game plan and you follow it, then you’re not going to let emotions cause you to make bad trades.
Don’t Get Greedy
Last but not least, don’t get greedy!
This is probably the easiest way for people to blow up accounts.
This is where you see people YOLO on weeklies or on some news event trying to go for those 10 baggers.
Hint, hint those are really rare.
When you see decent profits, remember to take some of those gains off the table.
A good rule of thumb is….if it’s good enough to take a screenshot of, it’s good enough to lock it in.