90% of option traders lose money
Even people who are highly knowledgeable about the financial markets and work in the industry do poorly. There is evidence all over the place that losing money in options is normal and “everyone in the know knows it”.
I never got good at options trading, but I never encountered anyone else who was good at it, either. Some people admitted that they lost money overall, while others, although they spoke readily of their wins, were evasive about losses and totals. This was less surprising when I discovered, to my disappointment, that many of the people who traded options were also gamblers.
Most people who continue trading options lose ALL the money they allocated, if they were smart enough to allocate an amount.
Trading options was the one activity at which I could not improve by studying or practicing
If I study hard and work at something, I get better at it. Two years of effort and study did not improve my results at trading options. When study and practice bring no payoff at all, it is a red flag indicator that the activity might be one at which it is not possible to improve. The possibility must at least be seriously considered.
Option purchases are a “limited-risk” speculation… but the limit is 100%!
The same is true of stocks, but you will almost never lose 100% on a stock.
The “limited risk” feature of options only distinguishes them from futures contracts, where you can lose much more than you invest.
Your loss in an option is limited to 100%, but you can lose 100% over and over again. To offset those losses, your gains, when they occur, must be very large. They can be, but they rarely are.
Options lose time value from the moment you purchase them
Your stock must not only move (assuming the option follows the stock, which it doesn’t always do), but must move in time for your option to overcome its time-value loss since you bought it.
Options markets lack liquidity
In India,except Nifty most of the Stock Options lacks liquidity and there are wide difference between Bid and Offer Price and Brokerage can make Succesful Option trade less profitable forget about Loss making trades!
Commissions on option transactions are high
Your options must make a significant move in the right direction just to overcome your commission costs.
Options are short-term, and they expire
You are forced to trade often. You cannot simply buy and hold. If you want to stay in the market, you must replace expired options with new ones, incurring repeated commission expenses.
You cannot use a long term strategy to wait out setbacks. If a stock makes a big move against you, your chances of it recovering before expiration are small.
Option prices are not formally related to the price of the underlying stock
From the emphasis that is so often placed on formulas that supposedly calculate the “value” of an option, you would think that there must be a formal relationship between the price of a stock and the price of an option on it, but there is not.
Like everything else, the value of an option is whatever someone is willing to pay for it at a particular point in time. If it’s hot, it’s hot, if it’s not, it’s not, and an underlying stock and the options on it don’t always fall into and out of favor at the same time. Option prices move independently of the price of the underlying stock, and sometimes track the stock surprisingly poorly.
Option prices reflect the expectations of options traders about what the stock is going to do. As soon as a “technical move” looks likely, the options will often move in anticipation of it, to the point that they would be worth after the move has already occurred. If the move doesn’t happen, the options drop. If the move does happen, often the option has already made its move, and won’t budge any further. If you wait for a signal, others (like the specialist or floor traders) will get there first. If you anticipate a signal, you’re going on “nothing”.
The real fair value of an option is probably its market value.
Trading strategies are arbitrary, contradictory, and only work in retrospect
There are many trading rules such as “Cut your losses, but let your profits run”, or “Sell after any 5% retreat”, “Always use limit orders”, etc. They all sound like good strategies, and they all are good strategies in one situation or another. Unfortunately, you don’t know ahead of time which strategy will look good in hindsight, and they are all so vague and contradictory that they have no use except in hindsight. You might just as well complain, “Oh why didn’t I buy low and sell high like I knew I should?” because most trading rules are of little more use than that one. They are fine for looking back, but they don’t help going forward.
After a bad trade, you can always go back and see where you went wrong, discovering how some particular strategy would have saved you, but the same strategy that would have saved you this time would kill you another time, so what use is it?
In options, perfection is required, but something always goes wrong
You must correctly predict the stock’s move and the time during which it will make that move. You must buy the option at the price your calculations are based on. Then you must sell at the right time, in the right way, having chosen the right method (stop-loss, limit order, or market order at time of sale), and your order must be executed rapidly and correctly by your broker and the options exchange. In too many option trades, some part of it goes wrong.
I am not saying that you cannot make a killing in options. You can. But it’s extremely unlikely, and if it does happen, it’s not because you are “good at it”.People Made Killing during May 20 2009 in Nifty calls after election results ,but its like once in a time kind of phenomenon.
To some this will sound like a sour grapes story, but I know that there is a difference between an activity that I cannot become good at and one that no one can become good at.
Let’s compare forms of gambling as a somewhat appropriate analogy. I do not like gambling, and if I thought that’s all that options trading was, I never would have had any interest in it.
There are games like poker that require skill and that it is possible to become good at. Newcomers usually lose, but their results improve as they gain experience. I would be a bad poker player because I don’t have the skills. However, experienced and consistently successful poker players do exist.
On the other hand, there are slot machines, state lotteries, and roulette. They require no skill, do not reward skill, and are mathematically impossible to become good at. I would be bad at those games not because I am unskilled, but because no one can be good at them. It’s in the nature of the activity.
My conclusion about options is that because of the factors described above, I cannot become good at it, and neither can anyone else. It’s in the nature of the activity.