The number one reason why most options traders fail is they rely solely on market timing for success. If you're using options simply as a leveraging tool to make more money on the predicted movement in a stock or index, you'll have many trades go in your favor, and from time to time, you'll experience fantastic gains.
The statistic that 90% of option traders lose money can be attributed to factors such as inadequate education, poor risk management, speculative behavior, overleveraging, lack of a trading plan, and susceptibility to emotional decision-making.
The report indicated that 91.5 per cent of small traders (those trading less than Rs 1 lakh) lost money in FY24. Reasons for these losses include market volatility, small price changes, transaction costs, and psychological factors that work against the average trader.
What went wrong? I explored the reasons for failure at options trading and narrowed it down to two main reasons; 1. Lack of a proven and systematic approach which novices to finance and economics can follow and trade with. 2, Lack of a robust trading mentality.
Options have a finite lifetime, and once they expire, they're settled up among the traders and then cease to exist. You can have the right thesis, but if it doesn't play out before the option expires, then you'll also wind up with worthless options.
Only 10% of traders make money, and the remaining 90% end up in a loss. There is a 25% chance of losing your investment and a 75% chance of profit.
The option sellers stand a greater risk of losses when there is heavy movement in the market. So, if you have sold options, then always try to hedge your position to avoid such losses. For example, if you have sold at the money calls/puts, then try to buy far out of the money calls/puts to hedge your position.
If you're looking to get started, you could begin trading options with just a few hundred dollars. However, if you make a wrong bet, you could lose your whole investment in weeks or months. A safer strategy is to become a long-term, buy-and-hold investor and grow your wealth over time.
Poor Risk Management
Traders who fail to set and adhere to stop-loss orders or those who over-leverage their positions can suffer significant losses when the market moves against them. Using stop-loss orders can assist investors in controlling emotions and preventing hasty decisions driven by fear or greed.
The estimated average salary for an options trader in the U.S. ranges from $65,000 to $185,000. However, retail traders using their own capital may earn more or less (or even lose money) depending on their trading proficiency and trading capital.
There's a common misconception that options trading is like gambling. I would strongly push back on that. In fact, if you know how to trade options or can follow and learn from a trader like me, trading in options is not gambling, but in fact, a way to reduce your risk.
In the case of call options, there is no limit to how high a stock can climb, meaning that potential losses are limitless.
Legendary investor Warren Buffett is a proponent of time diversification and firmly believes that stocks are less risky in the long run. Therefore, he often sells long-term put options instead of buying them for portfolio protection.
George Soros is perhaps the most renowned trader in the world, famous for “breaking the Bank of England” in 1992. His audacious bet against the British pound earned his fund over $1 billion in a single day.
You might very well have the patience and diligence to get rich with options. It will probably take you years to accomplish, but with dedication and effort it is entirely possible to make a lot of money with options on top of your long-term investing.
Options Trading
Futures trading doesn't give you ownership of the underlying asset; you only have a contract to buy or sell it in the future. Here, too, you don't own the underlying asset; you only have the right to buy or sell it.
If you think the stock price will move up: buy a call option, sell a put option. If you think the stock price will stay stable: sell a call option or sell a put option. If you think the stock price will go down: buy a put option, sell a call option.
When options expire, any in-the-money options are typically exercised automatically, meaning the holder will buy (for calls) or sell (for puts) the underlying asset at the strike price. Out-of-the-money options expire worthless, resulting in the holder losing the premium paid.
As options approach their expiration date, they lose value due to time decay (theta). The closer an option is to expiration, the faster its time value erodes. If the underlying asset's price doesn't move in the desired direction quickly enough, options buyers can suffer losses as the time value diminishes.
But is trading options for income in order to make a living realistic? YES. The great part about the options market is that they are very flexible, in that there are so many ways to approach them. Options trading can be a great way to make money, but it is difficult.
Swing trading is most suitable for beginners due to this low speed.