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Avoid Rookie Mistakes

By Ken Trester

I've been playing the options game for more than 35 years, and I've come to learn firsthand why the first hour of trading on Monday mornings is called "amateur hour" by many brokers.

Like clowns piling into a tiny car, when the opening bell rings on Monday mornings, many traders jump right into their new positions and end up paying too much.

There are hundreds of thousands of traded options, and finding the few that offer a stellar risk-versus-reward picture is no walk in the park.

So, how do we solve this problem?

I am adamant about adhering to a certain price range when initiating any new trade, because any amount that someone overpays cuts into their profit potential.

But when you're trying to get into a new trade, you don't always know how much is too much to pay. One thing you can do is watch how trading shakes out during "amateur hour." Once the novices have placed their trades and the "big boys" jump in and begin their own trading day, you can get a better feel for where the options you're eyeing "should" be trading.

Although historical price data isn't readily available for options, you can check out any free financial Web site before the trading day begins to see the prior day's action. Although option prices can increase incrementally, like stock prices, the moves are oftentimes more dramatic as a small move in the underlying stock can translate into a sudden, huge move in the options.

'Making It' In The Markets

The market is a moving parade. Market-makers set the opening price for stocks and options every trading day, and that's why a security closes at one level and can open the next day at a different level.

A variety of factors contribute to this -- news over the weekend (i.e., a CEO being told "sayonara" by his or her board of directors) can make stocks and, in turn, their options execute a surprise move on the open.

In that case, it is what it is -- the option price will move out of our range because of the surprise opening gap. But that's neither the only problem nor the most-common one.