Options trading carries greater risk compared to owning stocks. For instance, if purchasing Google stocks at $500/share isn’t within your budget, then it’s unlikely that buying Google options at $5,000 will be feasible for you either. This is due to the fact that options are bought in blocks of 100, meaning a single option priced at $50 equates to a $5,000 purchase for 100. Be wary of ostensibly cheap options for high-priced stocks, as the expiration date could be imminent. For example, I recently came across a $2.00 Google call option that expires in only 14 days. Should you not achieve profitability within this short timespan, your entire investment could be lost.
Crucial Points to Consider
Options trading is complex and is not recommended for beginners. Even experienced hedge fund managers have suffered significant losses from options trading. Brokerages legally cannot permit you to trade options until you’ve demonstrated that you’re an experienced investor with over a year of trading history.
Many options traders do not profit. Software providers for options trading often entice customers with claims of 80% prediction accuracy. However, such claims are unrelated to the profits their clients might achieve. Options trading requires precise timing; even a day’s delay can result in substantial losses. To accurately asses the success of a trading strategy, you need to know the clients’ annualized gains over time – information companies typically do not disclose. According to statistics, less than 2% of options traders end up making money.
Always thoroughly investigate track records. When presenting cumulative gains, many financial advisors and companies will quote total gains, which should be divided by the years to obtain an annualized return. For example, a cumulative gain of 50% over twenty years translates to a modest 2.5% annual return, which is hardly impressive compared to Treasury bills, which carry less risk.
Options trading offers a limited window to secure return on investment. Once an option expires, you could potentially lose your entire investment if you haven’t managed to turn a profit, or be “in the money.”
In conclusion, you’ll encounter a myriad of sales strategies promoting options as an easy pathway to wealth or a means of financial protection. When options are promoted to inexperienced investors, it’s usually the software provider and the salesman who are the true beneficiaries. Exercise caution when promised overnight riches from investments in gold, oil, gas, or futures in commodities such as corn, cotton or pork bellies.
