One of the mistakes beginning options traders make is they put on too many different options trades.  So they may wind up trying to manage options for six, ten or even twelve different stocks.

That’s certainly manageable if you were just trading or investing the stocks.  But options are different.

For starters, they move quicker.  So the can increase or decrease in value much more dramatically.  It’s not unusual that an option can double, or lose half its value in a day.  Now I’m not saying that is always the case, but it happens more often than you can imagine.

Now think about stock prices.  This is almost unheard of.  I can’t recall any stock trade I’ve done that ever doubled, or lost 50% in a day.

And they can reverse direction just as quickly.  Now it is true that stocks typically move up and down during the trading day.  But the effect on your portfolio value is not magnified nearly as much.

And here’s another one.  Options are more complex than straight stock trades.  Options value is derived from the value of the underlying stock (hence the term derivatives) but that value does not exactly match the movement of the stock.  In general it does.  Most of the time it does.  But not always.

For example, as of this writing I have two options trades on for the OIL index fund.  I have September 30 strike price calls – and I have September 27 strike price puts.

How about that.  The calls are betting the price of oil will go up.  The puts are betting the price of oil will go down.

You may gather I am making a play on the threat of war with Iran which could dramatically rais the oil price by cutting off access through the Straits of Hormuz.  And the puts are insurance if this doesn’t happen.

Here’s a head scratcher for you.  At one time yesterday BOTH the calls and the puts had made a little money.  Huh?  The price of oil went up and down simultaneously?  No, not really.  It’s just in the options market, at that moment, some people THOUGHT the price of oil would go up, so they were willing to pay a little more for the calls.  And AT THE SAME TIME, some other people thought the price of oil would go down, so they were also willing to pay a little more money for the puts.

See what I mean?  Option prices, in general, follow the underlying price movement pretty closely.  But NOT exactly.

So for that and other reasons, they are more complex to manage.

So let’s summarize all of this.  Options are more difficult to manage because they move quicker and they are more complex than stocks.  So this means you usually have to pay more attention to them.

Which means you can’t have too many of them going all at once or you will lose control.

But don’t just take my word for it.  David Caplan, one of the greatest options traders out there, said that he typically does not try to manage more than three or four trades at one time.  So if a great options trader like David says this, it’s probably good advice for you and me, right?

Now, some options trades are trickier than others.  So this is not an absolute rule.  But it’s a good general guideline to keep in mind.

So as you begin trading options, start slow and work with just one or two option trades at once.  Then you can build from there as your skill level increases.

To your health and prosperity – John