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Experimenting before learning

Most skills are learned best by doing. However, real money is on the line when trading options, so experimenting with different strategies could cost you.

Instead, take the time to learn these strategies in greater detail. The tastytrade Learn Center is a great place to start to cover the basics. They provide weekly platform demos that could help connect your learning experience better. These 45-minute sessions show the tools and features available to you so you can trade smarter.

A trading simulator is a common way to practice strategies and techniques. tastytrade’s CEO, Scott Sheridan, recommends using these tools as a launchpad for real trades but warns about becoming too reliant on them.

“Many novice traders like to start off using a trading simulator to practice, but what we discovered is that it created a lot of bad habits,” he says. “In a trading simulation, people would keep a trade if it was a loser. They'd add to the trade, then add more, and then wait for it to come back. Or they’d delete it. Well, you can't delete a real trade.”

Sheridan believes when you transition from a sandbox to the real market, it is important to keep trades small, especially if you are trading new strategies.

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Trading without a plan or not sticking to a plan

Diving into a trade without a plan is not a recipe for success. The best traders are methodical in their approach and have a robust system for discovering opportunities, placing trades, mitigating risks and exiting positions.

Even an experienced trader could be tempted to stray from their plan. A lack of discipline could derail an otherwise excellent track record. In the last few years, we have seen the impact of social media and influencers complicating trading decisions. It’s easy to deviate from a strict plan and place trades based on rumors and hype generated online.

“Traders should avoid herd mentality since it usually does not end well,” says Sheridan. “There's nothing wrong with having conversations with other traders and sharing information. But at the end of the day, make your own decisions and take responsibility for them.”

Special features such as Curve Analysis and Order Chains on the tastytrade platform can help you manage risk carefully with ease. Plus, a live video stream from their network affiliate, tastylive, covers a wide array of trading and market topics providing you with valuable trading insight throughout the day.

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Leverage is a double-edged sword. Sure, using margin can boost your gains significantly. But too much can potentially jeopardize your entire account—and possibly more. It is important to always know your risk and have plans to mitigate it.

tastytrade offers two types of margin accounts. The first being a standard margin account with three possible levels (with the most flexible level being “The Works”), and second being portfolio margin (PM) accounts. PM accounts give traders up to 6.7 times leverage compared to 2:1 leverage in a standard margin account.

A built-in margin calculator lets you see your margin requirement for every trade. tastytrade’s no additional charge broker-assisted trades and relatively low margin base rate of 10% can potentially help the cost of margin trading.

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Neglecting risk factors

Profitable options traders identify and mitigate as much risk as possible. The risk of illiquidity, for instance, can be better managed if you get a clearer sense of the bid-ask spread.

Other risks, such as time decay and volatility, must also be managed. Option traders use sophisticated calculations to measure the so-called ‘Greeks’: delta for changes in underlying asset price, vega for volatility or theta for how the option price changes over time.

You can learn these complicated Greeks, or you can use tastytrade’s built-in strategy menu and Greek columns to see the measurements for each strike price before placing an order. Avoiding a manual calculation can save time and reduce errors while trading.

Another way to mitigate risk is to consistently learn and upgrade your knowledge as market dynamics shift.

According to Sheridan, “Anyone who thinks that they mastered trading options hasn't. Anyone who stops learning is making a mistake in trading and in life. We should be learning every day.”

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Forgetting about taxes

A great trader isn’t necessarily a good accountant. However, it’s easy to stack up tax liabilities when you’re trading multiple times a month. Profitable trades could incur capital gain liabilities while unprofitable ones could potentially be used for tax-loss harvesting. In other words, getting the taxes right is an essential step for preserving your wealth.

The tastytrade Tax Centre serves as a hub for all the necessary tax documents you might need during tax season.

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tastytrade, Inc. (“tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade offers self-directed brokerage accounts to its customers, and does not give tax, financial or investment advice, nor does it make trade recommendations. You alone are responsible for making your own investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services, or products. Account and trading permissions are subject to tastytrade’s suitability requirements and approval.

Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.


The content provided on Moneywise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.