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Why Most
Option Traders Lose
A lot of
people are attracted by
options. The reason is that these derivatives
mostly
can profit with three digit percentages within days. Whenever there
is a lot of money to earn there you can find a lot of traders trying
to get rich quick.
But the
sad truth is that most stock
option traders who are there for the fast buck are losing
money
instead of earning money. A whopping 80% of all option buyers are
losing money.
It's very
simple: If you don't know the
principles of how financial options work you will sooner or later
lose money in the options markets. It's not enough to know that
options are also called derivatives because the value of a stock
option depends on its underlying, in most cases a
stock. The
underlying is a security which the option is based on.
There are
some things with options that
most traders or investors don't know, for example that option selling
is possible without having bought one. And other option strategies
which involve the usage of both calls and puts at the same time are
also possible.
Most
option traders also lose money as
a special feature of options is not really understood: The decay
of time value. Every option unlike a stock has a limited span
of
life which is called expiration date. After time
proceeds it
happens quite often that the underlying remains unchanged in its
value but the option of this underlying has lost a decent amount.
Why?
Because
the price or premium of an
option consists of its inner value plus the time value. Every day
that is passing away the option, no matter what happens, loses a
certain percentage of its time value. And the time value can be the
only part of the total price when you buy out of the money options.
When you
have understood this matter
then you know much more than most other option traders or option
investors.
Now its
up to you if you want to learn
more about how options work in certain market conditions.
Although
options are quite risky there
are option strategies which enable you to lower your risk. To warn
you upfront: Buying options is the most risky
strategy of
option trading. So, don't listen to any option master, educate
yourself to an option expert and decide which option
strategies
are the best for you.
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