Options are very Risky!
For most readers of my blog this is an avoidable post. My simple, sincere, honest advice is stay away from options.
However there are some die hard borrowers (leverage lovers) for whom options are tempting…and many times fatal. Options are risky is a right statement for investors. However if you are a trader who holds a position for a day (or worse a few hours and you are a day trader) options may be a better choice.
Any investment position is risky if there is a time frame to it. For example if you need money on 15th June, 2011 you are better off keeping 80% of that money in a bank fixed deposit and 20% in equity. Or in a Short Term MIP. The reason is it is difficult to predict a one year performance of the equity market.
Similarly in options the scary part is it has an expiry date (In India you can buy 1 month, 2 month or a 3 month option only). However in other stock exchanges (abroad) you can buy Long Term options (3 years!) – obviously the risk here is less than the 3 month option. If options can go to zero, remember so can equities.
Too many people will baulk at the thought of keeping equities for 3 years, such people might as well be in options – after all if you can get the upside by investing 15% of the capital you might as well protect the other 85% by keeping it in Index funds or bank fixed deposits.
Please stay away from options if you do not know how it works. Disciplined leveraging is an oxymoron for most retail players.
Manish
I totally agree Subra
I have done some serious options trading for 1.5 yrs and then decided to back off accepting that some thing is wrong with me only , I was making mistakes and boosting my ego lot of times and which added to my losses I made . I lost money but gained amazing insights about derivatives and how dangerous it is .
It might work wonders for very very disciplined traders who actually know how options work and really fast and crystal clear in what they want. However still high expectation is what will kill even them, For a person with high hopes in options , it should not exceed 5-7% a month if he wants to last long 🙂 , thats my experience .
Manish
subra
There used to be 2 places which were the graveyard of the ‘overconfident’ – the CA course and the stock market. Have been through both :).
The CA course has become easier I have been told. The market continues to be a graveyard of the overconfident..:)
Siva
Hi Subra,
I got some doubts regarding the index funds. In some previous articles, you have asked “why going for index funds when some non index funds regularly beaten the index?”. And you also questioned the composition or on how the index is calculated.
The index of some foreign markets are well below their historical highs. Even sensex/nifty have given 0 returns over some periods (long periods). So my question is, does index funds really have edge over actively maintained funds?
thanks,
Siva
drgowshank
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Manish Jain
I think options are less risky than futures. Futures, you do not pay any premium but options you pay premium.
This premium is what you can lose the most. So you know your maximum loss before buying an option. Ofcourse the options writers are BIG people(Institutions/MF/FII/HNI) who overall never lose money. It is all small investors who on the average lose money in options.