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Understanding the Risks of Options Trading

Posted by Pete Stolcers on March 5, 2010

Option Trading Question

What can I expect to experience as a new trader?

Option Trading Answer

Whether you are still thinking about getting started or are actually stepping into the world of stock options trading, it is very important to take the time to learn and really understand what all of the risks involved are before investing large amounts of money and possibly losing it all. When it comes something as volatile as trading, you need to make sure that you understand exactly what the risks are.

Option trading is not for the weak of heart and requires active participation as long as there is money in play. Although there is the chance to make a lot of money, you can lose everything in a heartbeat without proper preparation. This also means you need to constantly be on your toes and always be reviewing and modifying your strategies and plans to work with whatever changes the market throws at you. Become connected with the world through internet and television and whatever other ways that you are able to so that you have all the information as quickly as possible. This will help you to stay ahead of the game.

Remember that option trading is not really investing. It is more like speculating and taking on a business risk with the hope of making a profit from the market fluctuations. To be a successful trader, you need to become good at predicting the outcomes, analyzing situations and making a decision based on where you think the market will go. It can be a stressful decision and one that shouldn’t be made lightly.  If you are up for the risk and are sure you understand what you can lose and only trade what you can afford, then options trading may be exactly the kind of excitement that you are looking for. Options trading can be a very rewarding investment if you are careful and aware of everything going on around you. Just make sure that you research the risks involved and always strive to learn as much as you can to reduce the possibility of losing money.

Option Trading Comments

  • On 03/11, Tim said:

    Options aside, please explain how one could make a profit from a stock like BEC that has consistantly traded between 65 and 68 for the last six months but the bid/ask is 64 to 71? The open interest and volume on the options are lower than I would feel comfortable trading anyway but what if they were?  The chart looks like a good “rolling” stock but the bid/ask price makes the stock look flat. Any thing to educate us on this situation?

  • On 10/20, Rodger said:

    Pete,

    I have been looking at call options and for all the research I’ve done I have found no information on what happens if you do not exercise your option by the expiry date, please help

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