As with many things in life, the 80/20 principle can help guide and focus our attention on the most important aspects of options trading. In particular, trade entry and executing an options order correctly is critical to your success. I've often said that great entries save you from having to be good at everything else, like adjustments and rolling contracts. Today, I want to help you avoid five of the big mistakes you can fall subject to when placing a new trade. Some are small fixes while others will require a little more work on your part, but ultimately help you reduce risk (hint: it's the last tip in the show).
Key Points from Today's Show:
- Order entry is such a big part of what we do as options traders.
- When looking at your options trading system, 80% of your focus should be on making the best possible order.
- If you take care of order entry and getting into the right positions, everything else will fall into place.
- Therefore, most of your execution and emphasis should be on order entry.
1. Fat Finger Trades
- This is when you get into a position and you enter a couple of extra contracts by accident.
- It can also be when you choose the wrong ticker symbol or the wrong direction
- Generally, it is when you enter a trade and you do not double check for any incorrect positions.
- Until you get more familiar with trading do one of two things:
- Paper trade a specific strategy as many times as possible, first -- the repetition concept.
- Analyze every single one of your trades -- add trade to portfolio Beta weighting curve to see overall impact.
2. Forcing Entries Because of Time
- Why do we need to rush to get trades on?
- Even when there is a time pressure, it does not mean that you need to force a trade or use market orders.
- We need to be patient with our entries and let the market "come to us".
- Enter an oder and if it doesn't get executed, adjust it and see if it still makes sense.
- There is no excuse for chasing the market for the sake of getting into a position.
- In some cases, it make work out in your favor to wait an extra day to get a good setup.
3. Checking the Order Type
- This is a very simple check, but prevents you from randomly entering market orders versus a limit order.
- Sometimes the type of order ends up being a GTC, which means that the order stays active until it is filled.
- Traders assume it's a limit order for the same day, but then it doesn't get filled until a few days later.
- Same thing on stop losses, make sure you understand and check the different terminology.
4. Market Maker Baiting
- If you enter an order to sell an iron condor for $100 and immediately when the order comes in, the price goes down to $98, then you enter another trade for $98.
- As soon as you enter the market for $98, the market price drops to $96.
- This creates a stream of baiting to draw traders in as the price adjusts.
- Instead of following the baiting stream, let the market trade around your price, wait for it to fill and see where the market truly is.
5. The Missing Strike Price Logic
Example: You are placing an iron condor trade where you are selling inside legs and buying outside legs. On the put side, you do a $5 wide spread. On the call side, you also do a $5 widespread creating a balanced iron condor. In most cases when you do that and you don't actually look at the pricing of each of the individual option contracts, sometimes you will find that the call-side options are much cheaper. This happens in low implied volatility markets. Even though you are doing a $5 widespread, the long call option that you bought $5 out is already practically worthless and very cheap insurance for your position.
*You might be able to get the exact same pricing two strikes in on the call side.
Example: If you are looking at a stock that is trading at $100 and you sell the 105 and buy the 110 on the call side. The 110 option may only cost you a $1 because it's so far out and has a low likelihood of getting hit. If you look at the whole pricing table, what you might find is that the 108 call option is also $1. So if you arbitrarily build out a strategy that's $5 wide on the call side, you're missing a real opportunity to reduce risk for the same exact price, because in this case you can buy the 108 call option and effectively have a $3 widespread on the call side, which means that if the stock rallies, you only lose $3 on that side of the trade, reducing risk for the same amount of money.
*The missing strike price logic leads people to execute an order that could be much better if you took time to check strike prices.
