Why are options considered to be more risky than the regular stock trading?

Question

Why are options considered to be more risky than the regular stock trading?

Answer 1

Good Question.

With options you are buying the RIGHT to purchase a company's stock at a set price.  If the stock does not hit that price your option becomes worthless.  You can trade your option at any time, however, many times for a nice profit without the option hitting the strike price.

So if you are just trading options, it can be a very risky proposition to buy something that might not come to fruition.

But options give you leverage. An options contract (call or put) represents 100 shares.  So 10 contracts represents 1000 shares.  If you bought some Nov. 20 calls on Citigroup when it was trading around 14 you did very well for yourself.  Citi is now trading around 20 and your options went through the roof.  They don't expire for another four months and you just have to decide when to cash in. Assuming that it goes up from here.

Had you bought Citigroup 10 puts when Citi was at 14 you would now be in trouble.  Citi is trading at 20 and is arguably heading higher.  The money that you put down in buying your put (short) options is more than likely gone.

Hope this helps

Answer 2

(1) Option prices tend to move by higher percentages than stock prices.

(2) Options are a "zero sum game" since for every long position there is a corresponding short position. Consequesntly, for every dollar one trader makes on an option contract another trader loses a dollar. Stock is not a zero sum game. There are more long positions than short positions, so for every dollar the price goes up more people make money than lose it.  Since, on the average, stock prices go up over time, there are more winners than losers.

(3) Options are more complicated. The only thing that has an implact on the price of a stock is what option traders call "delta" while "gamma" "vega" "theta" and "rho" as well as "delta" all have an impact on the price of an option.

(4) Option traders are allowed to use more leverage than stock traders.

-----

It is true that if you learn options well enough you can control the risks associated with them and actutally have less risk than a stock trader, but most people do not learn options that well.

Answer 3

because they have expiration dates.