Options are probably some of the most popular but least understood investments options.  And more and more people are using them every day, with little understanding of the risks involved.   When you trade options you definitely have several major advantages.  You have the ability to control large amounts of stock at any one time for a relatively small cost.  Having control of that much greatly increases your earning potential.  Or it can increase your potential loss.  Options are very versatile that can allow you to make money regardless of the direction the market turns.  But when you trade options there are definitely risks you should be aware of in order to make an informed decision.

Trading options will require a lot more research than any other type of stock trading.  There are many types of options, some are very basic and others are quite advanced.  If you don’t know the difference between puts, calls, long positions, or short positions then your strategy and success will be severely limited.  Not doing your background research will only increase your risk while decreasing your reward; it is definitely worth the time to know what you’re buying.

When you trade options you also must constantly monitor them.  There is no such thing as an option trader that simply buys the options and holds them.  You can never succeed that way.  A good option trader will continually monitor the condition and position of his existing options and look for opportunities on new options.  Your risk level will chance with the amount of time you have to monitor the market.  If you have nothing else to do, your risk will be significantly less than someone who just checks in for a few minutes a day.

One of the huge risks of trading options is the fact that you can lose your entire investment.  This is a situation in stock trading that is unique to stock options.  With any other stock you can lose a portion of your investment if the market tanks but you can never lose the entire investment unless a company goes bankrupt.  But when you invest in an option and the price of the underlying stock moves in opposition to what you want, you can lose all of your investment

Another risk is that all options expire.  Again this is unique to stock options.  With other stocks if it turns sour, theoretically you have unlimited time to wait for it to recover.  Options, however, always have an expiration date.  So if the expiration dates arrives before the stock has time to recover, you can lose every cent your put into the investment.  This is where practice can definitely make you a better trader.  If only takes a few times of losing your whole investment to learn from your mistakes and monitor the stock market a little more carefully.  It won’t completely prevent the situation from reoccurring but it will lessen the risk.

Also be aware that option prices can be very unpredictable.  This is one area where options are similar to the underlying stocks that they represent.  The price of options can fluctuate wildly and unpredictably just like a normal stock would.  Option prices can fluctuate even more since they are the stocks magnified, this magnifying the stocks losses and gains.

Finally, just because you have been successful in the past does not always mean you will continue to do so well.  As with all investments, the market conditions can and do change.  When that happens, your risk with your stock options does too.  You can only be as cautious as you can and realize that sometimes the market will throw you a curveball.