Forex Options – 3 Simple Tips for Big Consistent Gains
By Kelly Price
Options are a great investment tool, due to the fact they give you the advantage of limited risk and unlimited profits. options can make you big profits, if you use them correctly. If you don’t, you will join the 90% of option traders who lose.
Forex traders who end up in this losing majority tend to make two critical errors.
1. They Buy Out Of The Money Options
When most traders buy options they tend to buy options that are a long way from the strike price, as their cheap and that if the strike price is reached they will make huge profits.
The big problem of course is that:
“if the level is reached” is not a certainty and is only a projected profit.
Option traders need to keep in mind that an option way out of the money is cheap for a reason and the reason is:
The odds of the option trading in the money are low.
Buying an option way out of the money is like betting on the outsider at a horse race – the outsider very rarely wins!
The way to make money in options is simple:
Buy at or in the money options, your potential reward is smaller, but your odds of success are far greater. A projected profit is just that, not money in the bank and any options trader needs to keep this point firmly in mind when trading and not get carried away with unrealistic profit targets.
2. They Don’t Get Time on Their Side
In addition to buying options to far out of the money to get cheap premiums, options traders make another fatal error:
They buy options to close to expiry.
The closer an option is to expiry, the more critical the time element is, as it will erode the options value the closer it gets to expiration.
If you want to make money from options get plenty of time on your side and buy options which are months away from expiry, rather than weeks or days.
Just
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as in point one, your profits will be less, but your odds of success will be far greater.
When buying options be realistic about targets and get plenty of time on your side, your odds of success will then increase dramatically. Options give you a big advantage, in that they allow you to ride out short term volatility and stay with the trend - WITHOUT getting stopped out by short term market volatility and are a useful tool for any trader.
Today, volatility is one of the major obstacles that traders face when implementing a successful trading strategy, Options can provide a good way of coping with it, but you need to (as in all trading) get the odds on your side to win longer term and the two tips above will help you do just that.
