Why You Should Never Buy Or Trade Options
If you’re like most people, you’ve probably been bombarded with ads from online brokers promising to make you rich quick by trading options.
What is options trading (in layman’s terms)?
Options trading is a type of investing where you speculate on the future price of an asset, and you buy or sell options contracts accordingly.
An option contract gives you the right, but not the obligation, to buy or sell an asset at a certain price by a certain date. If the price of the asset goes up as you predicted, you can make a profit by selling the contract. If it goes down, you lose money.
There are two main types of options: call options and put options. Call options give you the right to buy an asset at a certain price, while put options give you the right to sell an asset at a certain price.
While it’s true that options can be a helpful tool for savvy investors, there are also some very good reasons why you might want to steer clear of them. Let’s take a look at them below.
8 reasons why you shouldn’t trade/buy options
1. They’re complicated
If you’re new to investing, the world of options can be daunting. There are all sorts of lingo and jargon to learn, and the strategies themselves are often complex. That’s why options are best suited for experienced investors who have a solid understanding of what they’re doing.
2. They’re risky
There are a few reasons why options trading is generally considered to be a high-risk activity. First of all, when you buy an option contract, you’re essentially gambling that the price of the underlying asset will go up or down. If it doesn’t move as you predicted, you can lose a lot of money – sometimes even your entire investment.
Another thing to keep in mind is that option contracts usually have a relatively short lifespan. This means that if the price of the underlying asset doesn’t move as you predicted within the timeframe of the contract, you will lose money.
Options trading is also risky because it’s often used as a tool for speculation. This means that people are more likely to trade options in an attempt to make a quick profit, rather than using them as part of a long-term investing strategy.
3. The odds are stacked against you
When you buy an option contract, you’re essentially placing a bet. And like all bets, the odds are usually against you.
This is because you need to be right about not just the direction of the move, but also the timing and magnitude of the move. If even one of these things is off, you can lose a lot of money.
4. You can lose more than your investment
When you buy an option contract, you’re paying for the right to buy or sell an asset at a certain price. The most you can lose is the amount you paid for the contract.
However, if you buy a call option and the price of the underlying asset goes down, you’re not just out the money you paid for the contract – you could also end up losing money on the asset itself. This is because you’ll still need to sell it at the strike price, even if that’s below the current market price.
5. They’re often used for manipulation
Options contracts are often used by people who are trying to manipulate the market. For example, they might buy a large number of call options in an attempt to drive up the price of the underlying asset.
This is harmful for two reasons. First of all, it can hurt other investors who are holding the asset. And second, it can create false or artificial prices that don’t reflect the underlying value of the asset.
6. You need to monitor them closely
Another thing to keep in mind is that options require constant monitoring. That’s because the underlying asset (i.e., the stock) can fluctuate dramatically in price, and those fluctuations can have a direct impact on your position.
As such, you need to be prepared to devote a significant amount of time and energy to monitoring your positions. If you’re not comfortable with that, then options trading might not be for you.
7. They can be difficult to sell
If you decide to exit your position before the contract expires, you might have a hard time finding someone willing to buy it from you. This is because most options contracts are not traded on major exchanges, and there’s often a limited market for them.
As such, you might have to take a significant discount on the price in order to find a buyer. This can eat into your profits – or even turn them into losses.
8. You own nothing
When you buy an option contract, you’re not actually buying the underlying asset – you’re only buying the right to buy or sell it at a certain price.
So while you might make a profit if the price of the asset goes up, you don’t actually own anything tangible. You don’t hold shares in the company, and you don’t have a stake in its future.
Conclusion
In these uncertain economic times, it’s important to be careful with your money. And that’s especially true when it comes to investing.
Options trading is a risky business, and there are many potential pitfalls, as we hope we’ve demonstrated in this article. If you’re interested in more tangible investing, consider buying shares in companies you both know and use regularly.