Are Options Riskier Than Stocks?

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Options are far more risky than owning stock. As for affordability, if you can’t afford Google at $500/share, you probably can’t afford the Google option at $5,000 either. (You have to buy options in lots of 100, so one option at $50/per is purchased as 100 for $5,000.) If you see a very cheap option for an expensive stock, check the expiration date! Today, I found a $2.00 Google call that expires in just 14 days, meaning that if you are not “in the money” within that brief two-week period, you will lose ALL of your investment.

Four Important Tips

    1. Not for beginners. Binary Options trading is not easy and is absolutely not for beginners. Even experienced hedge fund managers have had huge losses trading options. Brokerages are not allowed to let you trade options until you sign a piece of paper verifying that you are an experienced investor who has been trading for more than a year.
    2. Most options traders lose money. Options trading software companies say that their software predicts with 80 percent accuracy. That claim has nothing to do with how much money their clients make. With options, you have to be right within a narrow window of time. If you are a day late, you are a dollar short (and could lose all of your investment). For true measurements on how successful a strategy is, you need to see the actual annualized gains earned over time by every single client (something the company will never provide you with). The statistics that I have seen indicate that less than 2% of options traders make money.
    3. Track records must be scrutinized. Many money managers and companies will quote cumulative gains, which must be divided by the number of years in order to get an idea of what the gains each year are. For instance, 50 percent cumulative gains for twenty years is only 2.5 percent gain per year. That is not very impressive when Treasury bills have beaten that return, with far less risk and work.
  1. Narrow window to be “In the money.” Options trading limits the amount of time that you have to make a return on investment. When the option expires, you can lose all of your investment, if you are not “in the money.”

The Bottom Line You’ll get all kinds of sales pitches on options as “insurance” or as an easy way to make a lot more money. When options programs are hawked on newbie investors, the only person making money is the software manufacturer and the salesperson. Be just as wary of salesmen touting the millions you’ll make overnight on gold, oil and gas, and futures on corn, cotton and pork bellies.