Why do traders lose money in options trading?
Most people suffer losses in option trading and majority of them are retail investors.The purpose of this article is to explore the rationale behind this occurrence, presenting a detailed analysis for our readers' enlightenment.So let us know in detail what is the reason due to which retail investors are not successful in option trading.
Lack of knowledge:-
Most of the people who make losses in option trading are those who lack knowledge.Inexperienced individuals often approach the stock market with the misconception that it is a guaranteed source of wealth, akin to a money tree. However, without obtaining the necessary knowledge and skills, achieving overnight riches remains an unrealistic expectation.
If you trade without learning option trading, you will be ranked 9 out of 10. In option trading, you need to know about option chain, option Greeks, option expiry, open interest, and choosing the right strike price.
Trading based on tips and calls:-
It is a common occurrence for people to seek easy money through stock market tips, disregarding the necessity of putting in effort. It is important to realize that depending solely on tips can result in financial setbacks.Those with a deep understanding of the market would have made money through trading rather than sharing tips if they possessed true knowledge.Tips are just a business of calls and nothing else. You must stay away from this thing, increase your knowledge and do trading yourself.
lack of patience:-
People want an instant money-making machine. People learn trading but due to lack of patience they end up incurring losses. Premiums work in options trading. In option trading, impatience can result in unfavorable outcomes. Traders often find themselves hastily closing their positions, only to realize that the market subsequently moves in their desired direction. As options involve considerable volatility, maintaining patience is essential for achieving financial gains.
Working in OTM:
Due to less money, people work in OTM strike price. OTMs are available cheap, and people end up incurring losses in the pursuit of cheapness. There is only time value in OTM and even if the price starts moving in your direction, it will not give you much benefit because of only time value. Therefore, you should not take the wrong strike price in the name of cheapness.Opting for an incorrect strike price in options trading equates to a purposeful and avoidable loss of your financial resources.However, there is also a strategy to work in OTM.Proper utilization of OTM can significantly amplify your financial gains, resulting in multiplied returns on your investments.
This is the biggest reason why most people suffer losses in option trading due to time decay. When the market is in a range, the option buyer suffers a loss due to time decay. People who buy options without knowledge often fall into the clutches of time decay. For those who buy options in a range bound market, their premium gradually disappears due to time decay. You need to understand option Greeks. You can make money in option buying only with option tricks and the right strategy.
Don't be greedy!
There are some traders who make losses in option trading due to excessive greed. Too much greed means not exiting the trade even after reaching the target. In option trading you must be completely loyal to your target and stop loss. Due to time delay in option trading, even a profitable trade turns into a loss. Therefore, greed is also one of the reasons why people fail in option trading.Wrong strategy and risk reward:-
It is important to have the right strategy in option trading. Newbies try to take a trade somewhere and when the price starts moving in their opposite direction, they get nervous and either exit the trade or start holding it. Traders hold their losses but do not wait for profits. If you do not take care of risk reward, you will not be able to make money.
It is important to have the right stop loss and target in your trading strategy. Accordingly, you have to enter and exit the trade. Newcomers do not know the correct trading strategy and where to enter, where to keep the stop loss and where to set the target and end up incurring losses. It would be better if you trade through a strategy only.
Conclusion:-
The conclusion of this article is that 9 out of 10 traders lose money in options trading due to lack of knowledge. If you gain knowledge of option chain, time decay and correct strike price and keep in mind everything mentioned in this article, then surely you can become a successful option trader. Do not enter the market without any knowledge of options trading. Make a better strategy and practice it daily.If you don’t want to fall in the category of 9 out of 10 people, then first stop trading based on tips and start gaining knowledge. Stock market is a business, take it seriously like a business. When people complete their studies to get the degree to become a doctor and then become doctors, then why do people want to enter the stock market without knowledge. If you don't have time to learn the stock market, then why should you enter here. Consider these things only then you can take a better decision.
FAQ:-
Why do most options traders lose money?
Many Options or entirely stocks do not have liquidity. This not only makes the entry difficult due to the difficulty of getting a good bargain but also makes an exit difficult. At times in many stock options, there are no quotes after a big move. This makes it impossible to book profits.