When people have discovered their fondness for trading with stocks they sooner or later come across a different financial instrument: derivatives .There is only one reason why most traders are attracted by this word like magic: Exponential profits.
This is by the way the same reason why people like to trade with stocks too. They want to receive a return on their investment. However, when they notice that derivatives make much stronger movements they leave their interest for stocks behind. Simply put, why should some waste his time and money with stocks when there are possibilities which offer you a much higher ROI?
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The problem is that derivatives are high risk financial instruments which means that you can also lose much more compared to stock trading. As we said above, people like derivatives because they make insane upward jumps. The problem is that those moves also happen to the other direction and that is what most people simply overlook or maybe don't want to see, which is more a psychological phenomenon also called greed among traders.
why risky? And what are the biggest mistakes beginner derivative traders make?
beginner traders think that they can implement the same strategy in case the derivative is in the loss like when they deal with stocks: Wait until it gets back up again. Why doesn't this work with derivatives? Very simple: Because one of the main drivers for an derivative to lose money every day is its time value. This time value gets lower with every day until it reaches zero at the expiration date. Thus, you cannot simply wait when derivatives have gone to the negative. You must act fast otherwise the risk of losing all of your invested money is very near.
beginner traders like to buy "cheap" looking derivatives. The reason: Their upward movements are much stronger (when they happen). And here lies the other problem. Those cheap derivatives, also called out-of-the-money (OTM) derivatives have a much lower probability to gain value. The price of such an derivative is made up of just its time value because it doesn't have an inner value (that's why it is called OTM). So, when a beginner thinks having bought a cheap derivative is a clever move because this one can only gain value he should know that those derivatives generally close with a total loss. Often those traders give as an argument: "I haven't invested so much in it." This can be true but if you go on like this small amount quickly sums up to a big investment. All traders whether new or experienced should know that stocks and also derivatives have nothing in common with gambling. If you simply buy derivatives with the intention to get lucky in case the improbable scenario occurs there is no need to invest in derivatives. Why not simply do betting instead? And for those who really want to profit with derivatives: Why not begin like a smart derivative trader and invest with a sound strategy that can make you much more money in the long-run?
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