Is options trading risky?
I always see this question in the comments of my YouTube videos.
People express concern about options trading by insinuating that it is “picking up pennies in front of a steamroller”, and comment that “selling option premium is risky”.
Traders believe that being active and being aggressive will make them money.
Except, it won't if they're trading a bad strategy and not optimizing their entries.
Some traders even believe the fake day trading gurus who use fraud to steal money from innocent victims.
Day trading might be engaging and sound exciting (except, in reality, it's not), but the fact is that day traders usually lose a lot of money.
Check out this day trading study that analyzed 360,000 day traders and... 359,000 LOST money, an average of 15% a year.
It's almost impossible to make consistent profits by day trading.
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In my opinion, the only way for retail traders to be successful is by selling option premium.
As a result, if you learn how to sell option premium, you'll earn around ~50% a year, and ~30% a year if you trade option spreads / verticals.
Here are the two things you can do to improve your trading and maximize your profits:
Trade Small & Be Patient to Optimize Your Trade Entries
1. Sell option premium to Reduce Risk
People who tell you things like selling premium is "picking up pennies in front of a bulldozer" do NOT understand how to make money in the stock market.
The only way that you can earn a consistent income that exceeds the SPY index is by selling option premium.
When you sell option premium, you BECOME THE INSURANCE COMPANY
YOU BECOME THE CASINO.
Would you rather be the gambler who's looking for lottery tickets? Of course not.
That is the difference between a day trader and an options trader.
Make up your own mind to improve your life by learning the best options trading strategies.
Learn about put and call options so that you can make money consistently.
Learn the options trading basics (whether it's options spreads or naked options).
In my article about the 3 hard truths you must know about options trading, I discuss why I believe trading naked options is best and I also provide some examples.
Have realistic expectations to reduce options trading risk
To be successful when selling options premium, you should always have realistic expectations.
Your mind needs to be rational when considering the possible outcomes of your choices.
You can’t buy Amazon and, because you sold a put that trades 10% below the current market price, think it will go bankrupt the next day.
Amazon is a TRILLION-dollar company.
A company this size has thousands of employees and complex infrastructure.
"People who tell you things like selling premium is 'picking up pennies in front of a bulldozer' do NOT understand how to make money in the stock market." - David Jaffee, BestStockStrategy.com
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If you bought the stock, you wouldn't automatically assume that it'll go bankrupt the next day, so why would you think that if you sold an option then Amazon would go bankrupt?
When buy a stock, I’m sure you don’t think about the company going bankrupt the next day.
People who say that trading options premium is risky and that it's like picking up pennies in front of a steamroller are unsuccessful and losing traders.
If you trade options correctly, you’ll see that there's no better way to make money in the stock market besides selling option premium.
2. Trade Small & Be Patient to Reduce Risk
When trading, it's best to trade small and be patient so that you optimize your trade entry.
Trading small is a great way to limit your risk if you don't have much experience.
Also, you should never stop learning, no matter how much you already know. There are many ways you can learn about options trading: books, articles, podcasts, courses, videos, etc.
As long as you're dedicated to constant improvement then you can be an incredibly successful options trader.
Those people who blame others for being unsuccessful traders have to learn more about selling options premium and trading.
It’s no one’s fault that you are losing money but your own.
Making money in trading is only possible if you trade options and do it correctly.
You must be patient and not be greedy. If not, you'll end up like OptionSellers.com
Being a successful options trader requires substantial discipline.
Ensuring that you wait to enter a trade so that you optimize the amount of premium collected is very important.
Most people are not successful traders because they think that they can make quick money.
Quick money doesn't exist.
When people trade stocks and hope that the price will go up or down, they have a much worse statistical probability of profit when compared with options traders who sell premium.
When you trade options and choose a safe strike price, you have more opportunity to be strategic and earn money consistently.
All you need to do is learn.
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Conclusion (Is Options Trading Risky?)
If you're looking to make consistent profits in the stock market, then selling option premium is the ONLY strategy that is statistically proven.
Why buy Amazon at $2,000 when you can get paid to own it at $1,700?
Selling options is proven in the real-world.
By selling options, you're turning yourself into an insurance company or acting like a casino.
By day trading or buying stocks, you're acting like a gambler.
Those who claim that selling options is like picking up pennies on a railroad track are not successful traders or investors.
You can optimize your returns and minimize losses by being disciplined and patient (and by not trading too large or being greedy).
By learning to be disciplined and optimizing your opening trades, almost all of your trades will be profitable.
Is options trading risky? Yes, it can be, but it can also be very rewarding and profitable.
If you have any questions, leave a comment below. You can also contact me on my David Jaffee personal website.
Frequently Asked Questions (FAQs)
What are the disadvantages of options trading?
The disadvantages of options trading is that options trading utilizes significant leverage. If you do trade too large then you can be forced to close out positions at the worst time and suffer a large loss.
What are the pros and cons of options trading?
The pros are that you can earn significantly more money than by buying and holding stock while also achieving a much higher win rate on your trades.
The cons are that you can easily lose money since options contain leverage.
What are the benefits of options trading?
The benefits of options trading is that you can earn significant returns while mitigating your risk, if done correctly.
Is options trading risky?
Options trading can be risky if traders are not disciplined. Oftentimes traders trade too large or engage in low probability trades that cause them to lose money.
Options risk management
Options traders can easily manage their risk by not trading too large and buying options (both puts and calls) when they believe that the market is overbought or oversold.
