Are Options Riskier Than Stocks? Exploring the Financial Dynamics
Options trading is riskier than just owning stocks. If you can’t afford Google stocks at $500 per share, buying Google options for $5,000 probably isn’t going to work for you either, since options come in sets of 100. Buying a single option priced at $50 means you have to pay $5,000 for 100 of them. Watch out for options that seem cheap for high-priced stocks because they might expire soon. For instance, I saw a Google call option priced at $2.00 that was expiring in just 14 days. If you don’t make a profit within that tight timeframe, you could lose your entire investment.
Here’s what you need to know: Options trading is complicated and not suitable for beginners. Even seasoned hedge fund managers have faced major losses with it. Brokerages will not allow you to trade options until you’ve proven you’re an experienced investor with at least a year of trading history.
Many people who trade options don’t make a profit. Options trading software providers might boast about 80% prediction accuracy, but that doesn’t necessarily translate to profits for their clients. Success in options trading depends on exact timing; missing the mark by even a day can cost you. To really understand a trading strategy’s success, you’d need to know the annualized gains over time for their clients, which companies rarely reveal. Statistics show that fewer than 2% of options traders actually make money.
Always check track records thoroughly. Financial advisors and companies might present cumulative gains without explaining that you should divide these by the number of years to see the annual return. For example, a 50% cumulative gain over 20 years is just a 2.5% annual return, which isn’t very impressive compared to safer investments like Treasury bills.
Options trading provides a small window to make a return. When an option expires, if you haven’t been able to make a profit, you might lose your entire investment.
In the end, you’ll find plenty of marketing tactics selling options as an easy way to get rich quickly or as financial protection. When options are sold to inexperienced investors, it’s often the software provider and the salespeople who truly benefit. Be skeptical of promises of quick wealth from investments in things like gold, oil, gas, or commodities futures such as corn, cotton, or pork bellies.
