Option trading is risky - Read this first before trading

Use of this website is for informational & entertainment purposes ONLY* 

There are many risks involved when trading and this is true as well for option trading. Beloew we have listed some of these risks but there are more risksand you should study the approriate literature first and consult a professional investment advisor before trading options!

General Risks

Trading of any kind, be it with with stocks, options and futures, involves the substantial risk of loss and is not suitable for every investor. When the market moves against you, you may sustain a total loss of your invested capital. In some cases you can even lose an amount greater than the amount you deposited into your account. You are personally responsible for all the risks and financial resources you use and for the chosen trading system. You should not engage in trading and/or option trading unless you fully understand the nature of the transactions you are entering into and the extent of your exposure to loss. If you do not fully understand these risks you must seek independent advice from your financial advisor.

Option trading is RISKY !

Options aren’t the right thing for every investor. Options can be risky but can also provide substantial opportunities to profit for those who properly use this flexible and powerful instrument.

The advantages of trading options: Trading with options requires a lower upfront financial commitment than trading with stocks. The price of buying an option (the premium plus the trading commission) is a lot less than what an investor would have to pay to purchase shares outright. The options investors pay less out-of-pocket money to play in the same sandbox, but if the trade goes their way they’ll benefit just as much (percentage-wise) as the investor who shelled out for the stock.

There’s limited downside for option buyers. When you buy a put or call option, you aren’t obligated to follow through on the trade. If your assumptions about the time frame and direction of a stock’s trajectory are incorrect, your losses are limited to whatever you paid for the contract and trading fees. However, the downside can be much greater for options sellers.

Limited time 

The problem with options is, that you are investing for a limited time as each option has an expiration date. So it might be, that you vision for a stock was right on the point but that the price will reach your target when your option already expired worthless. So you had the right idea but still lost all the money. Option investors are looking to capitalize on a near-term price movement, which must take place within days, weeks or months for the trade/contract to pay off. That requires making three correct assumptions: picking the right basis instrument, picking the perfect time to buy the ption contract, and deciding exactly when to exercise, sell or walk away before the option expires. Stock investors instead have all the time in the world cause the market does not give them a deadline. They can wait months and years, to let their investing theses play out.

Loosing all invested money

When you buy a Strangle you are buying Calls and Puts for a stock. These options have a limited time frame to gain value. As our approach is to buy options out-of-the-money - these options lose value each day as long as the underlying stock does not reach a special price. This might result in a total loss of the investment at the eypiration date.

 

So keep in mind, that a Strangle bears the risk that you lose all invested capital!

 

And if you do not act properly at the expiration date you might run into worse trouble and could lose way more than your investment. Actually there is an unlimited risk in this case (read below the part about the Assignement Risk and check out the exampe).

Beware of issuing options

At TheStrangle we ONLY buy Calls and Puts. We NEVER EVER are issuing/writing options. The reason is that we want to limit our risk to the amount invested and do not want to risk everything if a trade runs against us.

 

If you are the writer (seller) you have a different risk than if you are the holder (buyer). If you buy a call, you are buying the right to purchase the stock at a specific price. The upside potential is unlimited but the downside is limited to the premium that you spent (the porice you paid for the call). The maximum you can lose is the price you paid for the call. If you buy a put, you are buying the right to sell a stock at a specific price. Here the upside potential is limited to the difference between the share price and zero. The maximum you can lose is the price you paid for the put.

But as said somewhere above/below, even as an option  buyer you can lose way more than you invested if you hold the option until expiration and end in the money. See "Assignment risk" below.

EXPIRING IN THE MONEY - ASSIGNMENT RISK

Call Options Expiring In The Money: When a call option expires in the money the buyer of the call option has the right, but not the obligation, to purchase 100 shares of stock at the strike price of the call option.  The seller of a call option that expires in the money is required to sell 100 shares of the stock at the option's strike price. Short options that are at least $.01 ITM at expiration are automatically exercised by most brokerage firms. To not get assigned, you can close the trade before expiration or roll the trade out to a farther expiration cycle.

Put Options Expiring In The Money: When a put option expires in the money the buyer of the put option has the right, but not the obligation, to sell 100 shares of stock at the strike price of the call option.  The seller of a put option that expires in the money is required to buy 100 shares of the stock at the option's strike price.  Short options that are at least $.01 ITM at expiration are automatically exercised by most brokerage firms. To not get assigned, you can close the put options before expiration or roll the put options out to a father expiration cycle.

Example what could happen to you:  Assume you bought a strangle for stock ABC. In January at the time of your purchase ABC was worth 25 $ and you bought 10 strangles (20$ puts  and 30$ calls) which are running until July 21st. Unfortunately the stock never goes way above 30$ and never way below 20$ - so step by step both of your options are trending to zero. On the day of expiration ABC has a market price of 28$ and there are only hours left before the market will close and your options will both expire worthless. That's why you do nothing and forget about them because they will be booked out of your account the next day.

But wonder - on the next day you look into your account and see, that your broker urgently requests you to send money. The reason: Just before the market closed the evening before there was a takeover rumour which sent ABC to 35$ (exactly what you were hoping for the whole time). But as your option was expiring the broker received 1.000 shares of ABC for you for the price of 30$ each. If they stay there until the market opens you can sell them for a hefty profit and no problems at all. But if for instance the rumour fades and the stock drops to 27$ at market open, you would have to sell them with a loss of 3$ per share which results into a 3.000$ loss. And the more contracts you hold the worse this could become. It could kill your account and maybe your reserves as well.

That's why we at TheStrangle try to sell all contracts some weeks before expiration or we a clinging onto our moinitor until the stock markets closes on expiration day.

Further Risks

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Website still in development 

As you can see - this website is still under construction. We are heavily engaged in trading and can only work on the website in our sparetime. But step by step it will get there. So come by from time to time and check out where we are. We can promise one thing - it will be an interesting journey.

Use of this website is for educational, informational and entertainment purposes ONLY!*

 

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