Options Trading Risks

In a nutshell, risk is taken to be the probability loss in capital. In simple terms, it can be taken as probability of losing your money. In stocks, the phrase ‘options trading risks’ is something very common to hear every now and then. Option trading is considered to be risky in the sense that high level of risk is associated with the trading capital because of the specific nature of stock options. There have been many cases where the options trading risks led to catastrophic results. Thus, it is mandatory for the people who are dealing with option trading to know about the details of this field to avoid heavy losses in future.

Exploring options trading risks
In order to understand the concept in detail, it is easy to classify the risks based on options sellers, options buyers and other risks. For instance, when considering the options buyers, the main risk associated with them is the risk related to losing investment in a short time span. This risk takes a serious turn when the expiry date draws near or when the option gets out of money. The value of the European style options can only be realized when the option is expired and not before the expiration time. This is because there is no secondary market for such options. While considering the legal implications of option contract, some of the exercise provisions tend to create risks. There have been some cases when the regulatory agencies have imposed exercise restrictions that make the people stop from realizing value.

There is a long list of risks related to options sellers and therefore must be known. For example, the options that are sold can be exercised by the regulatory departments any time, even before the expiration. In case the underlying stock increases, people tend to risk unlimited losses. Similarly when the underlying stock falls down, people tend to risk unlimited losses. The writer of options cannot take any effective remedy actions and therefore the call options can be performed after the market hours. The stock is always facing the unexpected swifts, thus the stock may fall or surge rapidly that lead to automatic exercises.

There are some other options trading risks as well which include risk related to erroneous reporting, and complexity involved in option strategies. The option markets have the authority bring the trading to halt any time. Apart from this, the international traders have another risk involved related to timings in different time zones.

Macro risk factors
Usually, there are three main macro risk factors involved related to any stock investment and are not related to options trading only. The three factors include primary risk, secondary risk and idiosyncratic risk. Primary risks are also known as market risk and occur when the market moves not as you have expected. Secondary risk/sector risk is the type of risk when the stock sector does not perform well. The main reason behind the down is the unfavorable economic conditions in the market and the stock markets simply collapse. Such a condition is taken to be the major options trading risk especially for those traders who make bullish strategies from several sectors. The third and the last factor, idiosyncratic risk/individual stock risk, is related to the shares of the company you had bought. The shares can be affected due to a number of reasons, like there is a possibility that the company declares itself to be bankrupt. This is an example of options trading risks as the traders’ money is at stake.

Overall, it is impossible to eliminate the options trading risks from the trading or sometimes, minimize them. Thus, the best way is to know about it in detail and take rational actions that can maximize your returns.

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