This is a question that most beginner traders ask, and the truth is; you can. Options trading is one of the riskiest trading strategies; you just need to be aware of the risks, embrace them and learn how to handle properly.
Here is something you should know; yes you can lose all your money in options trading at least when the stock you are trading goes bankrupt. However, this occurrence has a very minimal possibility. Now, the worst part is that losing your money has a very high chance and it can happen within seconds.
If you are wondering if options trading is risky and if you should proceed with the trade or not, then yes it is risky, but you shouldn’t just give up.
So how can you lose all your money and worse, within a short time frame?
First of all, options are derivative financial instruments that derive value from the price of their underlying assets. Once the stock expires, options cease to have value. Most beginners tend to trade options without having a proper understanding of their underlying risks.
For instance, call options may promise a good amount of income profits, but then these ‘out of the money’ strategies minimally work out. If in any case you are allowed to buy the stock at $50, then this stock will only be valuable if it stays above $50 but if it so happens that the stock goes below $50, then it ceases its value. This means that you will only be able to buy it at a lesser value than what the call option allows you to from the open market.
Well, if the above situation occurs at expiration, then the option would become an ‘out of the money’ deed, and thus you will lose all your investment.
Secondly, options have time limits. They expire definitely. Unlike stocks, you can’t hold on to losing options forever. Therefore, if you buy options that only have a few dates left to expiration and with limited time to move as predicted, then you risk losing all your money even if the move happens eventually.
Therefore, do not bea trader who prefers buying options at a lower price and risks losing all your investment quite quickly.
Now back to our question, could you lose all your money in options trading? Once more; YES. You could lose all your money with options trading. That is, if you buy options with very few days left to expiration and if you avoid ‘out of the money’ options. These could render you penniless in a short period.
One thing that you can however do is to risk only what you can afford to lose and nothing more. This way, you will avoid the ‘losing all your money’ situation and at least have a chance at the trade.
Also, try learning different options. Understand their differences, for example,the straddle vs strangle options, what makes one better than the other, the advantages and disadvantages and also their risks. Find out what works at what time and use it to your best advantage.