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How Can You Lose Money Trading Options?

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http://www.options-trading-education.com/24563/how-can-you-lose-money-trading-options/

How Can You Lose Money Trading Options?

The reasons to trade options include hedging currency risk, leveraging trading capital and locking potential profits as the market swings up and down. International businesses use options for risk management while speculators search for profits. To be successful one must adapt Warren Buffett’s first two rules on investing to options trading. Rule one is not to lose money and rule two is to always remember rule one. So, how can you lose money trading options and how can you avoid doing so?

Formal Forex Markets and Counterpart Risk Management

The vast majority of option trading takes place in on the CBOE, Chicago Board Options Exchange. You should be trading is this market to avoid counterparty risk, the risk that the other party in the trade will not fulfill their part of the contract.

Counterparty risk is the risk that the seller of an option will not sell when the buyer chooses to exercise the option. You buy a put on IBM believing it will go down and it does, substantially. You exercise the option expecting to sell at a strike price and substantially above the spot price where you will buy. It is payday! Thoughts of trips around the world sail through your head. Then, oops, the reason IBM is down is that the market is crashing and the seller of your put does not have the money to buy your stock! How does your risk management strategy avoid this situation?

Working through a strong intermediary helps avoid counterparty risk in option trading.

Be careful if you are trading outside of the CBOE because it is altogether possible to lose your money in an otherwise successful options trade.

Hedging Risk

Volatile markets are commonly the most profitable but these are markets where you can also lose big. Professional option traders develop a successful options trading strategy.

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How Can You Lose Money Trading Options?

  1. 1. By www.Options-Trading-Education.com
  2. 2. The reasons to trade options include hedging currency risk, leveraging trading capital and locking potential profits as the market swings up and down.
  3. 3. International businesses use options for risk management while speculators search for profits.
  4. 4. Before We Continue… Click the links below to get your FREE training materials. Free Weekly Investing Webinars Don’t miss these free training events! http://www.profitableinvestingtips.com/free-webinar Forex Conspiracy Report Read every word of this report! http://www.forexconspiracyreport.com Get 12 Free Japanese Candlestick Videos Includes training for all 12 major candlestick signals. http://www.candlestickforums.com
  5. 5. To be successful one must adapt Warren Buffett’s first two rules on investing to options trading.
  6. 6. Rule one is not to lose money and rule two is to always remember rule one.
  7. 7. So, how can you lose money trading options and how can you avoid doing so?
  8. 8. Formal Forex Markets and Counterpart Risk Management
  9. 9. The vast majority of option trading takes place in on the CBOE, Chicago Board Options Exchange.
  10. 10. You should be trading is this market to avoid counterparty risk, the risk that the other party in the trade will not fulfill their part of the contract.
  11. 11. Counterparty risk is the risk that the seller of an option will not sell when the buyer chooses to exercise the option.
  12. 12. You buy a put on IBM believing it will go down and it does, substantially.
  13. 13. You exercise the option expecting to sell at a strike price and substantially above the spot price where you will buy.
  14. 14. It is payday! Thoughts of trips around the world sail through your head.
  15. 15. Then, oops, the reason IBM is down is that the market is crashing and the seller of your put does not have the money to buy your stock!
  16. 16. How does your risk management strategy avoid this situation?
  17. 17. Working through a strong intermediary helps avoid counterparty risk in option trading.
  18. 18. Be careful if you are trading outside of the CBOE because it is altogether possible to lose your money in an otherwise successful options trade.
  19. 19. Hedging Risk
  20. 20. Volatile markets are commonly the most profitable but these are markets where you can also lose big.
  21. 21. Professional option traders develop a successful options trading strategy.
  22. 22. As always a successful options strategy on trading anything is based upon a clear analysis of the situation, development of an easily executable trading plan
  23. 23. commitment of sufficient time and effort to trade successfully, and a frequent review of options trading results in order to adjust a trading strategy accordingly.
  24. 24. Buy and sell calls and puts at the same time because the profit from selling offsets the price of buying options contracts.
  25. 25. And unless you have very deep pockets avoid just selling options.
  26. 26. Selling options without owning stock can be very profitable in the long run because sellers tend to make more money than buyers.
  27. 27. But there is a risk. Old and very profitable trading houses and banks have gone bankrupt over a few days or weeks due to traders doubling down on selling options and waiting for the market to turn around.
  28. 28. Always buy and sell in tandem and hedge your risk to avoid losing money trading options.
  29. 29. The one exception is a covered call option.
  30. 30. A covered call option is when the owner of stock writes an options contract obligating him or her to sell stock at the contract price, the strike price, at a future date, the expiration date, if the buyer so chooses.
  31. 31. Sellers of covered calls make money on the trade or keep their stock.
  32. 32. They never lose money trading options.

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