Option Risk - Are Options Riskier Than Stocks?
Option Risk - Are Options Riskier Than Stocks?
By:Josh Fabian
There are more steps and paperwork to trading options as opposed to trading stocks. Brokerage firms tell you this is because there are more risks trading options. But are there really?
Opening a stock trading/investing account is about as cumbersome as buying an over-the-counter medication. Maybe you need to show I.D., but that’s about the extent of the process. You are trusted to know what you are doing. Want to open an options trading account and it’s more like buying prescription medication.
After opening the stock trading account, you’ll need to fill out forms for options trading. But options accounts come in different varieties. Basic buying of options and selling covered calls is one option. Selling spreads? That’s another option. Want to sell naked options? That’s a third option. And if you want to maximize your money using margin, there’s another step.
Most brokerage firms tell you all these steps are to determine “suitability”. You may be smart enough to save money and understand the benefits of putting that money to work, but someone else entirely will decide what is suitable for you. Apparently, you aren’t that smart.
The added steps required to trade options perpetuate the myth that trading options is riskier than stocks. Is it possible to lose money trading options? Sure. It’s also possible to die from a shark attack on the beach during vacation. Statistically speaking, odds of a shark attack are low. Trading options has risks but those risks are no worse than trading stocks.
Options trading offers some distinct advantages to trading equities. To begin, we can control our entry. We know entering a trade 45 days prior to expiration is the point when theta decay accelerates, an advantage not available in equity trading. We can also choose the appropriate strategy depending on the level of implied volatility.
In an options trade, we can calculate the probability of being profitable. We can also calculate the probability of making 50% of the total premium sold. The only probability in equity trading is a 50/50 chance.
Another distinct advantage unique to options trading is not having to pick direction. Because we can calculate a stock’s expected range in a given period of time, we can sell options with strike prices outside of that range and remain directionally neutral. This gives us the added benefit of not needing to pick the right direction at the right time.
So why the extra hurdles opening an options trading account versus just a regular stock trading account? In a word, control. Complicating the account opening process with additional paperwork gives the illusion options trading is inherently more risky. Additionally, making the process more cumbersome leads many to just give up out of attrition. Both scenarios lead retail investors back to the products controlled by brokerage firms.
None of this is meant to suggest options do not have risk. They do. At tastylive, we provide our audience with the tools and education needed to understand probabilistic outcomes as well as the mechanics for executing smarter trades. We can’t eliminate risk altogether...in life or in trading. We just believe in taking smart risk by trading probabilistic outcomes that are not directionally dependent.
Josh Fabian has been trading futures and derivatives for more than 25 years.
For more on this topic see:
- Options Jive: Options Risks | Direction (Delta) February 16, 2016
- Options Jive: Option Risks | Volatility (Vega) February 22, 2016
- Options Jive: Option Risks | Changing Probabilities (Gamma) March 1, 2016
- Options Jive: Option Risks | Time (Theta) February 25, 2016
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.