Many traders are under the impression that, while they may be good at buying and selling stocks in the United States or Germany, they don’t have what it takes to trade options on English companies.
It is simply not true — while the basics of trading options on English companies are similar to what you’re used to, there are some common mistakes made by American option traders that can prove costly.
Here are three common options trading mistakes made by American traders when trading English stocks:
Not understanding the 20-day rule
All American securities exchanges require specific holding periods before an investor may exercise any right about a previously sold security.
For instance, if you sell your XYZ stock on January 10th for $100/share, you cannot exercise your right to repurchase XYZ stock at $80/share until January 20th – this is known as the “20-day rule”.
English companies do not have a 20-day rule.
If you sell call options on May 5th and decide to close out your position early on May 8th, you may still exercise those right up until expiry – even if that date is just two days away.
Not understanding English quarterly expiration dates
Most American securities exchanges have monthly expiration dates, meaning all short term options in America expire every month.
Just about any American trading platform or online broker you choose to use will automatically assign expiration dates as such.
However, English companies operate on a quarterly cycle – March, June, September and December – and each quarter is assigned an individual set of options that expire individually (i.e., the next expiration date for English stocks is always the third Friday of the month).
Not understanding English option symbols
When trading options in America, every stock has its unique option symbol – there are no two identical symbols among all American securities exchanges combined.
However, English companies often have similar option symbols, sometimes even the same.
It’s essential to check what symbols your trading platform or online broker uses when trading English stocks and stick to that options market only.
Otherwise, you’ll end up buying and selling the same stock, which can be disastrous if not caught early enough.
Let’s look at some of the most common options trading mistakes that traders in the UK often make.
Not having a hedging plan
Can use options to speculate or hedge against adverse price movements. The problem is that if you buy options without any strategy, the odds are stacked heavily against you.
If you don’t hedge correctly, all it takes is one bad trade, and your account could take a big hit.
The ‘lottery bias’
There are very few people who consistently win in options trading; when they win several times in a row (i.e. by chance), they get noticed and break into the mainstream news.
If you assume that the losers give up, then you’re making a mistake, as many keep trying until they run out of capital or reach retirement age.
Not knowing your trading budget
It’s crucial to know your risk exposure at all times, and you need to make sure that it’s within your trading budget.
Correct balance between speculation and hedging
Many people will try to use options purely to make money.
Still, the truth is that they are handy for hedging against potential losses too.
If you routinely speculate no matter what happens, then the odds are that a single bad trade eventually wipes you out.
Overconfidence is probably the biggest problem of all, and it’s why so many people get back into the market after making a loss.
They don’t believe that it could happen to them, that things will turn around tomorrow or any number of other excuses for not following their trading rules.
It can lead to severe problems over time if emotions influence your decision-making.
Not knowing your risk exposure
This point ties in with not having a hedging plan, and it’s crucial to know your risk exposure at all times.
Take a look at Saxo option trading for more info.