Risk of Option Trading

Every business has got risks, and the same case applies to options trading. Understanding these risks is important if you want to be successful in trading. It is important to approach a trading with the mind of a business person having analyzed your strength, opportunities, weaknesses and threats.

Time decay is an important element that you should have in mind. Unlike other derivatives, the value of the options decays during their last days much fast and at a higher speed than in its earlier days.  You should have sufficient knowledge of this risk and make use of it to your advantage during the implementation of your trading approaches. An additional benefit of options trading is that you can buy options as well as create fresh ones and sell them. The buying end is referred to as going end while the selling is known as going short. You can use time decay to make profits and minimize your losses. You can buy and sell options as a way of reducing losses because the combination of both short and long term positions becomes an added advantage.

The prediction of the future market of an underlying market or asset is another risk which is not limited to the options trading. Certain options trading strategies allow you to take both directions of the market. It works efficiently for you as long as it moves within an anticipated short time.  The best times to use these strategies is when there are a run-up and anticipation to new earning reports since the markets are also anticipating the news too.

Time decay is the greatest risk in options trading. It is worse if the market price is moving to no direction. Sideways market directions can quickly kill the value of an option but can be an advantage if you are at the selling end.