Watch Out!

There is a lot of risk involved in options trading. A lot of “authorities” on the subject won’t tell you this, simply because they want you to think that it’s an easy road to riches. Options can help you make money, but that doesn’t mean that it’s a simple or easy thing. If you want to be successful, you need to put the time and effort into things so that you will be successful. This takes numerous forms, and depending on what your goals are, there are at least a few things you can do to help improve your chances of success and lower the risk that you are taking on. We’ll show you a few of the easier things you can do here.

First, research the broker you are thinking of using long before you ever create an account or make a deposit. Have others had success? What are the trading forums saying? Are they certified under a securities organization? If they are a legitimate broker, there will be a lot of info about them out on the web.

Watch Out for TrapsNext, look at risk. We’ve talked about risk a little here and there, but risk is the major undoing of borderline traders. If you have a decent amount of skill, there’s still a strong chance that you will lose money in options. Think about what prevents you from making money day trading in the stock market. You could certainly probably predict that Apple will increase in price over the course of a few hours after a much better than expected earnings report comes out. But because of the cost of entry, day trading is hard. You will likely need to spend around $20 to purchase a few shares of the company, and then another $20 to sell those shares. If you expected Apple to rise by 5 percent—a huge chance—and Apple is trading at $100 per share, you would need to buy 8 shares of the company just to break even. $800 increasing by 5 percent equals a $40 increase in price. This would be if you were 100 percent correct in your prediction, too.

Most of the time, you would find that this was a silly risk to take. Major stocks rarely ever move in such a large fashion. This is too risky of a trade to make, especially on a small scale. The profit margin that is needed thanks to the cost of doing business is just too large. Trading erases some of this risk, but not all of it. You are not charged a fee for making a trade, but you do pay. This occurs when you’re incorrect in a trade. It’s a sort of two steps forward, one step back deal. When you make a correct trade, you earn a return, say 80 percent. When you’re incorrect, you lose all you risked. So, if you make three trades at $100, two right for a profit of $80 each, or $160, and one wrong, you’ve made $60 total. This hidden risk still impacts you, and needs to be accounted for.

You can do this by lowering your trade amount, using external tools like a signals service or trading robot, or by improving your trading strategy. Searching for ideal trades can help, as can finding a broker that has a better payout rate, so that this margin is slightly reduced.

Options are not a get rich quick thing. If someone tries to tell you that they are, they are likely not telling you the full truth, or they might even be trying to pull a scam over you. Don’t fall for it.