The fundamental reason why retail investor loses money in Options trading is this:
Retail investors are buying options most of the times instead selling options.
Surprised? Well, yes, as surprising as it sounds, that is the number 1 reason.
So if you want to dramatically improve your trading fortune, just do one thing:
Decrease buying options. Increase selling options
This post we published earlier made it very clear. Need more reasons? Here are some:
- Option selling is betting on the passage of time. Every day, options lose time value or theta. You cannot stop the passage of time — it is a certainty.
- Most institutions are option sellers most of the times. Most retailers are option buyers most of the times. You know who gets it right most of the times.
- Option selling is insurance selling. The financial institutions which write options are insurance sellers and they decide the premiums. Much like they decide our life or health insurance premiums and we just pay up for buying it. They make sure that they premiums stay at a level they can be profitable selling options.
Not convinced?Tell me the name of one insurance company which went broke because of too many claims. Let’s not bring AIG in 2008 here, right?
- Option selling goes awry only when huge movements happen suddenly. Most of the time nothing happens in the market. So as long as you avoid events and tread with a little caution, you’ll be fine. I used to jokingly tell a friend of mine this story:
Imagine someone sold a 1.5 year NIFTY 10000 Call and 10000 Put and went to sleep in August 2017. Trump, Modiji, Demonetization, Surgical Strike, Gujarat Election, North Korea… sure, a lot happened. But if our man wakes up after 1.5 years he sees NIFTY has moved 1.5%. And he will be like, “That’s it?”
Okay, that’s a joke, but you get the drift ;)
- People usually buy options when they are short of capital. In poker, this situation is called short stack play. Here is a tip: when you are low on capital, that is short-stack, most decisions you take will be recklessly risky, with the aim of making money back. And options buying is one such thing.
TL;DR: Please sell options rather than buy options. Every time you feel like buying a call do consider selling a put. If you are confused which one is better, use our Option Trade Analyzer tool here.
PS: When you do sell, stick to predictable options like index options. Avoid single stocks and events.
Would you be a net seller of options in your trades? Let us know your thoughts in the comments and we can help you with a few insights