Can You Lose All Your Money in Options Trading?
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Jason Ng
Apr 20, 2013, 9:00:04 AM4/20/13
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Article Title: Can You Lose All Your Money in Options Trading?
Author: Jason Ng
Word Count: 516
Article URL: http://www.isnare.com/?aid=600604&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=600604
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One of the greatest and most talked about risk in options trading is the fact that you could lose all your money in options trading very quickly. Well, many people lose all their money in stock trading too, so what makes losing all your money in options trading such a big deal? The fact is, investors only lose all their money in stock trading when the stock they buy becomes bankrupt which has a very low possibility of occurrence whereas the possibility of losing all your money in options trading is extremely high and can occur within an extremely short timeframe.
So, does that mean options trading is risky and should never be undertaken like what so many people in investment forums suggested?
First of all, lets explore what about options that made it possible to firstly, lose all your money and secondly, within a short time frame.
Options are derivative instruments which derives its value from the price of its underlying asset. It do not have value of its own upon expiration. A call option giving you the right to buy a stock at $10 only has value if the underlying stock is above $10. If the underlying stock is below $10, you are already able to buy the stock at lesser than what the call option allows you to from the open market and the call option thus has no value. When this situation occurs at expiration, the option would �Expire Out Of The Money� with no value left and you will lose all the money you used for buying those options. This is one of the most common way beginners lose all their money in options trading; By buying options with all their money as if they are buying stocks.
Secondly, options have definite expiration dates. Unlike stocks, you can�t hold on to a losing options position forever. Options have a definitely expiration date and if you buy options with too few days left to expiration and no time left to move as predicted, you would lose all your money very quickly even if the underlying stock moved as predicted eventually. A lot of beginners buy options with too few months left to expiration due to the fact the more months left to expiration, the more expensive the option becomes. As such, a lot of beginners make the mistake of buying options that expire very soon and then lose all their money very quickly.
As such, options trading can be risky and you can lose all your money very quickly in options trading if you buy options with all your money with too few days left to expiration. As such, when you buy options, make sure you buy options only with money you can afford to lose (maybe 2% or 5% of your total fund size) and make sure you buy with enough time to expiration (maybe 3 months and more). When you follow these two simple rules, you will be able to avoid the situation in which you lose all your money in options trading very quickly.
About The Author: Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management and author of http://Optiontradingpedia.com and http://Futurestradingpedia.com. Learn more about Options Trading at http://www.optiontradingpedia.com and learn more about Futures Trading at http://www.futurestradingpedia.com
Please use the HTML version of this article at:
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Message delivered directly to members of the group:
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*****************************************************************
Please consider this free-reprint article written by:
Jason Ng
*****************************
IMPORTANT - Publication/Reprint Terms
- You have permission to publish this article electronically in free-only publications such as a website or an ezine as long as the bylines are included.
- You are not allowed to use this article for commercial purposes. The article should only be reprinted in a publicly accessible website and not in a members-only commercial site.
- You are not allowed to post/reprint this article in any sites/publications that contains or supports hate, violence, porn and warez or any indecent and illegal sites/publications.
- You are not allowed to use this article in UCE (Unsolicited Commercial Email) or SPAM. This article MUST be distributed in an opt-in email list only.
- If you distribute this article in an ezine or newsletter, we ask that you send a copy of the newsletter or ezine that contains the article to http://www.isnare.com/eta.php?aid=600604
- If you post this article in a website/forum/blog, ALL links MUST be set to hyperlinks and we ask that you send a copy of the URL where the article is posted to http://www.isnare.com/eta.php?aid=600604
- We request that you ask permission from the author if you want to publish this article in print.
The role of iSnare.com is only to distribute this article as part of its Article Distribution feature ( http://www.isnare.com/distribution.php ). iSnare.com does NOT own this article, please respect the author's copyright and this publication/reprint terms. If you do not agree to any of these terms, please do not reprint or publish this article.
*****************************
Article Title: Can You Lose All Your Money in Options Trading?
Author: Jason Ng
Word Count: 516
Article URL: http://www.isnare.com/?aid=600604&ca=Finances
Format: 64cpl
Contact The Author: http://www.isnare.com/eta.php?aid=600604
Easy Publish Tool: http://www.isnare.com/html.php?aid=600604
*********************** ARTICLE START ***********************
One of the greatest and most talked about risk in options trading is the fact that you could lose all your money in options trading very quickly. Well, many people lose all their money in stock trading too, so what makes losing all your money in options trading such a big deal? The fact is, investors only lose all their money in stock trading when the stock they buy becomes bankrupt which has a very low possibility of occurrence whereas the possibility of losing all your money in options trading is extremely high and can occur within an extremely short timeframe.
So, does that mean options trading is risky and should never be undertaken like what so many people in investment forums suggested?
First of all, lets explore what about options that made it possible to firstly, lose all your money and secondly, within a short time frame.
Options are derivative instruments which derives its value from the price of its underlying asset. It do not have value of its own upon expiration. A call option giving you the right to buy a stock at $10 only has value if the underlying stock is above $10. If the underlying stock is below $10, you are already able to buy the stock at lesser than what the call option allows you to from the open market and the call option thus has no value. When this situation occurs at expiration, the option would �Expire Out Of The Money� with no value left and you will lose all the money you used for buying those options. This is one of the most common way beginners lose all their money in options trading; By buying options with all their money as if they are buying stocks.
Secondly, options have definite expiration dates. Unlike stocks, you can�t hold on to a losing options position forever. Options have a definitely expiration date and if you buy options with too few days left to expiration and no time left to move as predicted, you would lose all your money very quickly even if the underlying stock moved as predicted eventually. A lot of beginners buy options with too few months left to expiration due to the fact the more months left to expiration, the more expensive the option becomes. As such, a lot of beginners make the mistake of buying options that expire very soon and then lose all their money very quickly.
As such, options trading can be risky and you can lose all your money very quickly in options trading if you buy options with all your money with too few days left to expiration. As such, when you buy options, make sure you buy options only with money you can afford to lose (maybe 2% or 5% of your total fund size) and make sure you buy with enough time to expiration (maybe 3 months and more). When you follow these two simple rules, you will be able to avoid the situation in which you lose all your money in options trading very quickly.
About The Author: Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management and author of http://Optiontradingpedia.com and http://Futurestradingpedia.com. Learn more about Options Trading at http://www.optiontradingpedia.com and learn more about Futures Trading at http://www.futurestradingpedia.com
Please use the HTML version of this article at:
http://www.isnare.com/html.php?aid=600604
*********************** ARTICLE END ***********************
- To distribute your articles go to http://www.isnare.com/distribution.php
- For more free-reprint articles go to http://www.isnare.com
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