Do 95% of People Really Lose Money Trading Options?

02/18/2016 8:00 am EST

Focus: OPTIONS

Fred Oltarsh

, OPTIONS STRATEGY NETWORK

Though there is a multitude of reasons for why this staggering statistic may be accurate, Fred Oltarsh at Options Strategy Network points out that there are also options contracts that have a high degree of leverage and provide a reasonably small degree of slippage when traded.

It is said that 95% of the people who trade options lose money. There is a multitude of reasons why that may be accurate. Whether buying or selling options, there is a commission attached to each trade. Depending on the value of the option one is trading, that commission may amount to a substantial percentage of the value of the option that is being bought or sold. The higher the percentage, the less likely that one is getting fair value for the option they are trading.  A similar and likely more important analysis pertains to liquidity. If the bid/ask spread of the option is a substantial percentage of the price of the option being traded, the edge given up by the trader becomes a costly part of any options transaction. These two analyses are essential in choosing a trade which will potentially make money. As an options market maker in the pits for fifteen plus years, I had the benefit of assuming the advantage when customers sold to me on my bid and lifted my offer. I can tell you that the advantage that I had is the disadvantage that options traders face today. It is no small part of the reason that so many people lose money trading options.

There are contracts, however, which have a high degree of leverage and provide a reasonably small degree of slippage when traded. Leading the pack is the E-mini S&P options and futures. In addition, futures contracts like Crude Oil enable traders to participate in the market without giving up too much edge. Finally, while they are not as cost effective as the E-mini S&P, SPY options (SPDR S&P 500 ETF) and others, provide adequate liquidity to establish effective positions. In order to get reasonable value, evaluate liquidity and commissions for all trades that one is considering.

In addition to the liquidity test, options traders must be aware of implied and historical volatility and the implied volatility skew. To read the entire article click here…

By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network

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