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As technology has made stock trading easier in recent years, more traders have become comfortable calling their own trading shots rather than relying on a financial advisor. Unfortunately, few traders that options trading worth it their own investment portfolio have a background in finance, and many get lured into trading complicated financial products after hearing stories of other traders making huge gains overnight.
One of the more complicated types of financial products are stock options. A stock option contract is an agreement that gives the buyer the right to buy or sell shares of a stock at a given price on a given date in the future. There are plenty of anecdotal stories in the online investing world of options traders making 1, or 10,percent gains in a matter of days.
Much like stories of gamblers who hit the jackpot at the local casino, these stories may very well be true. Unfortunately, they are far from typical. A past study of Chicago Mercantile Exchange data showed that about 75 percent of all option contracts sold over a three-year period expired worthless. For starters, traders have to be much more accurate with their predictions to turn a profit buying options. In order for stock buyers to profit, they only have to get one prediction correct — the direction the share price will move.
Like a stock buyer, an option buyer must first correctly predict the direction in which a stock will move. While stock buyers can wait patiently for years before they sell, an option buyer must be correct by the expiration date of the option.
Every day that the option holder waits, the time value associated with the option diminishes. Many times, when a stock makes only a modest move, option buyers can be correct about timing and direction and still lose money on their investment. New options traders tend to make dangerous mistakes.
In addition, Graves says many traders opt to buy short-term options because they are cheaper, but these traders often underestimate how long it will take their long-term thesis to come to fruition. Simon Curio, options trading worth it of SimonSaysOptions. JJ Kinahan, managing director of client advocacy and market structure for TD Ameritrade, says the 75 percent statistic options trading worth it works in favor of option sellers.
Market gamblers looking to get rich buying options will largely be disappointed with the results. However, Curio says smart investors should flip the tables on these gamblers. Click here to options trading worth it reading.
Want to learn more about how options trading worth it profit off the stock options trading worth it When traders buy a call or put option contract, they must get no less than three predictions correct before they make a cent of profit from their options trading worth it The statistics and the horror stories of huge losses demonstrate how dangerous option buying can be, especially for inexperienced traders.
Instead, the true power of options for long-term investors may lie in selling them rather than buying them.