Don't be Greedy

Mistake #2 - Buying back the option when you just profited from selling it.

You know, there are 2 emotions which you would need to control in trading - fear and greed. This mistake is about greed. Have you ever bought a option contract and it gapped (up or down) on certain news alert or from an anticipated event. You were elated when your option gained some profit from this sudden movement and you promptly sold the option.

After selling your option, you thought there's no harm looking at development of the stock which you've just sold your option. But your smile turned to frustration as the stock you just sold off your option keeps going up steeply and you saw the option keeps gaining money which you could have potentially gained if you didn't sell off too soon.

So, you know what, greed stepped in and twisted your thinking. Thinking that you are a moron for selling too fast, you impulsively buy back the option (which could be quite expensive after gaining much value in such a short time) and felt so proud thinking you could reap further gains from this re-buying. But sometimes life just luvs to play tricks on us. The moment you buy the option, the stock starts to drop, and fast too. UUUHHHH !! Oh No !! Your earlier profits were erased from this stupid dip. NOW you STUBBORNLY refused to sell your option because you just couldn't take the reality that your nice little gain is wiped off. "I HAVE TO WIN IT BACK!!!". You keep telling yourself that. But alas the stock keeps dropping and you finally woke up and sell the option at a loss.

The solution is : Once you sold an option for whatever profit, be contended with it. To rid yourself of the emotional ups & downs of selling too early if it keeps going according to your trend, set a trailing stop so that you could keep riding on the profit if it trends favourably. If there is a reversal of trend and your trailing stop loss is triggered, at least you would still exit with a nice profit. As long as the market is alive, you have tonnes of opportunities to gain more profits from other counters in another day; as long as you applied the technique consistently which would help you pick winning options trades.