3 Mistakes to Avoid When Trading Options

NYSE: SCHW | Charles Schwab Corp. News, Ratings, and Charts

SCHW – Today’s featured article covers the 3 mistakes you should avoid when trading options. Continue reading to find out all the details.

As Charles Schwab (SCHW - Get Rating) led the charge into zero commission trading — which was quickly followed by everyone from other discount brokers such as E*Trade (ETFC) to full-service funds such as Fidelity – was rightly viewed as a boon for most traders.

But one of the unintended consequences might have been that ‘no transactions fees’ might come at a cost, especially to the retail stores or individuals it was meant to benefit, as it exacerbates some common errors

Here are three mistakes that free trading has exacerbated and how to avoid them.

1.Overtrading

The ease and quickness with which electronic platforms combined with no fees have made trading a point-and-click process has hastened the spray-and-pray approach to trading.

No commissions allows active traders to place orders first and then think about the consequences later. The attitude seems to be, “Let me establish the position and if it doesn’t go my way and I’ll just close it, no harm is done.”

The problem with this, especially with options, which still carry a typical $0.65 per contract fee, is that price slippage, which can cause losses to rack up even when nothing has happened.

Worse, is the tendency for people to get married a position and try to trade out of it, because after it all, trading is free.

2. Placing Market Orders

When trading options, I’m adamant about using limit orders, or those with a specified execution price. The bid/ask spread in options markets, especially in the open minutes or with fast-moving stocks can be brutally wide.

For example, last week when “Beyond Meat (BYND)”  shares were halted after being up 15% the bid the 140 call was $4 and the ask is $6, a whopping 40%.  If one is to enter and exit a trade using market orders, you’d give away 80% of fair value or what most likely would be any potential profit.

Don’t let low/free commissions lead into thinking you can afford to give away the edge on order execution.  Stick with price limits.

3.Too Many Orders

The flip side of the above is entering too many limit orders on the notion “I’ll get filled on a few” and go from there.

Again, the ease in terms of both mechanics and cost doesn’t translate into taking a more the merrier approach to trading. Leaving a scattershot of open orders can only lead to trouble.

When commissions were $10-$20 per trade, it created an entry fee and forced a more considered approach.  One tended to only pursue their best ideas and tried to execute the trades at optimal prices.

Remember, there are no bad trades, only bad prices. Don’t let those ‘free’ transaction fees lead you into taking bad prices which turn into very real losses.


shares were trading at $331.65 per share on Tuesday afternoon, down $0.30 (-0.09%). Year-to-date, has gained 3.04%, versus a % rise in the benchmark S&P 500 index during the same period.

 

 


About the Author: Option Sensei


Steve has more than 30 years of investment experience with an expertise in options trading. He’s written for TheStreet.com, Minyanville and currently for Option Sensei. Learn more about Steve’s background, along with links to his most recent articles. More...


More Resources for the Stocks in this Article

TickerPOWR RatingIndustry RankRank in Industry
SCHWGet RatingGet RatingGet Rating

Most Popular Stories on StockNews.com


How is the Stock Market Like a Helium Balloon?

Stocks have finally broke above 6,000 for the S&P 500 (SPY). The more important question is what comes next? Steve Reitmeister provides his answer in his latest market commentary.

Has the Bull Market Run Out of Steam?

It seems the S&P 500 (SPY) advance has stalled and cant crack above strong resistance at 6,000. Why is that happening? And what happens next? Read on for the answers...

Investors Remain “Cautiously Optimistic”

The S&P 500 (SPY) has made great advances since the lows of early April. Yet seem to be stuck under resistance at 6,000. What happens next depends on tariff talks. So let’s talk about the latest news on that front.

Bull Market Til Proven Otherwise

The phrase that paid for investors in 2025 was “Bull market til proven otherwise” Steve Reitmeister explains why in his latest market update and preview of top stock picks.

Investor Alert: Mission Accomplished?

The S&P 500 (SPY) has broken out above the 200 day moving average. Does that mean that bear market fears are now over? And should investors be riding the bull to new heights? Read on for Steve Reitmeister’s answer...

Read More Stories

More Charles Schwab Corp. (SCHW) News View All

Event/Date Symbol News Detail Start Price End Price Change POWR Rating
Loading, please wait...
View All SCHW News