Options trading is often known for spikes and dips, especially in a trader’s portfolio. Investing in options is an exceptionally risky way to make money. Options are very different from stocks, which are straightforward pieces of ownership issued by public companies.

 The concept of options explained: 

• It is a contract.
• The contract gives the buyer the right (not to be confused with obligation), to buy or sell the underlying asset by a certain expiration date at a specified price. The specified price is called “strike price”. 
• You can buy or sell a call option; you can also buy or sell a put option. 
• Call options: In these contracts, the buyer wagers that the market price of the underlying asset will rise above the strike price, while the seller wagers that it will fall below the strike price.
• Put options: A put option buyer ists that the market value of the underlying asset will drop below the strike price, while a put option seller ists that it won’t.

An option is less like buying shares in a company and more like renting an apartment or buying a house, getting it under contract and selling it to someone else without ever living in it.  

Why do most option traders fail?

 More than 70% of option traders lose. Just like in any other financial markets, most of them don’t know how to manage the risk. “We just trade with a big empty stomach, and if we lose, we will trade again with the same posture.”

 Even many professional traders, and those who have gotten some degree from a financial school fail too. But it’s not that everybody fails, someone has to win it all. Smart investors always try to minimize risks and hunt for opportunities. They always have a backup plan and find the weaknesses in their investment. These traits lead to consistency, the most important asset.

 Risk is an inevitable part of the financial markets, but some instruments carry more risk than others. Options are one of the riskiest instruments in the market. Regardless of what you are trying to accomplish in the market, be it making some extra money or enhancing your portfolio, options trading requires that you be aware of its risks.

 Risk 1: Premiums add up: You need to be comfortable with the possibility that you might have to pay the premium for nothing. The underlying asset could move against you, and the contract will be forced to expire. If you are comfortable with the risk, you know what you are doing. But paying premiums in vain time and time again could actually add up to cause a big overall loss. 

Risk 2: No option for no risk: For an option trader, there is no option for having no risk. There is a certain amount of risk if you buy/sell a call/put option. But there is also a risk if you miss the trade opportunities (make no trade at all). For most people, the shapes of risk are different, but the size is similar, but not for all. Investor Carlos Then, with his risk-management techniques, multiplied his initial investment amount by 210 times trading options not even a year ago. Risk exists one way or another, but the great investors manage to take calculated risks, rather than haphazard ones. 

Risk 3: Fees, fees and fees: You must pay a commission to your broker in addition to the premium you must pay for your options. As a result, before buying an options contract, it always makes sense to compare expected costs with possible earnings (and losses). If not, you risk having a loss that is higher than you anticipated or a gain that is smaller than you anticipated. The more you trade, the more you lose.

 Risk 4: You are not buying an asset: Unlike buying a company’s stock, it is easy to mistake a call option for an asset. However, all that you have bought are rights. Although this is not something concerning, a psychological effect of buying rights instead of assets sometimes hits. If you buy a call option, you buy the right to buy the stock. If you buy a put option, you buy the right to sell. Unlike holding a stock, it is not an asset, just an investment.

 Risk 5: You can get emotionally attached: While some traders swear by them, there are others who fear that the emotional side of trading is a negative thing that cannot be avoided when trading options. This is a weak point for many investors. Being able to handle your emotions is one way that traders differ from others in general. Options are a roller coaster of emotions, and there’s a lot to handle.

 Risk 6: Option market manipulation: Sometimes the options market is manipulated by a certain party, be it a company or individual. Manipulation of the stock also results in an option price change. It may be worth your time to research certain options, as this can help you choose whether to invest in them. Illiquid options are even easier to manipulate. Again, it is recommended to perform your due diligence before opening a trade position.

No trade is perfect and you can lose money in any market. The key to success is being able to manage your risks and make a profit in the process. This means calculating your costs and making sure that you have a plan for each trade that you put on.  

“It’s not the mathematical skill that’s critical to winning, it’s the discipline of being able to stick to the system. There are very few people who can withstand the losses emotionally and still stick with the system. Probably only one in five hundred people has the necessary discipline to be successful. “

 -Blair Hull, one of the most successful option traders

 Blair Hull’s time did not have rules written in stone, and modern-day option traders  like Carlos Then, don’t have things written in the cloud. They have a plan for when things are going as planned, and one for when things are going wrong. And they are disciplined with their plan—it’s their recipe for success.