Top 3 reasons for why option traders lose money (2024)

Shubham Agarwal pointed out top 3 reasons for why option traders loses money.

Shubham Agarwal

March 31, 2024 / 01:48 AM IST

Top 3 reasons for why option traders lose money (1)

Many of us tie ourselves to indices like Nifty, Bank Nifty, Sensex options initially. As soon as we get deeper into the trading game, we start venturing into Stock Options as well.

Shubham Agarwal

Options trading has always been an attractive investment opportunity due to its potential for big profits with limited losses for option buyers, as well as the consistency and success rate of option sellers. However, it has been recently discovered that the majority of option traders lose money in the market. In my opinion, this is due to the neglect of some crucial aspects of options trading.

Know Your Enemy in Options Trading becomes very essential. The majority of errors and losses arise out of that. Options are very mathematical when it comes to pricing them. There is still a human element involved, one of the reasons is that.

Many of us tie ourselves to indices like Nifty, Bank Nifty, and Sensex options initially. As soon as we get deeper into the trading game, we start venturing into Stock Options as well.

Reason 1: Different Underlying Different Option Strategy.

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Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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The first reason is rather simple to understand. Let's say you have mastered the skill of riding an elephant, and now you want to try riding a cheetah using the same expertise. However, there's a catch. While elephants are slow-moving creatures, cheetahs are fast-moving stocks. Therefore, you cannot expect the same results from both. Even though option sellers find it easy to use index options, they cannot apply the same ease to stock options. A 5% move in an index can halt trading, but it is a normal occurrence in stock options. If, God forbid, there is a double-digit move in a stock and we had sold a call in a rise or sold a put in a fall, we would be out of business.

Solution: Treat Stocks and Indices differently. With stocks the Volatility and Premium both are high, so do not be shy to Buy a Higher Call / Lower Put against a Put or a Call sold. This will avoid any big accidents and limit the losses.

Reason 2: Cheaper is Better Options

Option premiums work on a very scientific methodology. The majority of Options that go up ten or twenty folds are the ones that were a Rupee or so at some point in time. Most of the Option Buyers fancy this extravagant movement. The Potential to make 10X money is real but not frequent.

In search of these, the Traders would often Buy Higher Calls and Lower Strike Puts simply because they are cheap. If the stock does move in a day by a big margin, they would make money as well but if they do not or they do over 10 days, there may not be any money or even a loss.

This reason alone has put away a lot of people out of Options Trading

Solution: Try to Buy Options with not more than 2-3 strikes away from the strike closest to the current market price.

Reason 3: Buying into Illiquidity

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.

Solution: Trade Options where both Volume and Open Interest is more than 50 Lots.

Disclaimer: The views and investment tips expressed by experts on are their own and not those of the website or its management. advises users to check with certified experts before taking any investment decisions.

Top 3 reasons for why option traders lose money (6)

Shubham Agarwal is a CEO & Head of Research at Quantsapp Pvt. Ltd.He has been into many major kinds of market research and has been a programmer himself in Tens of programming languages.Earlier to the current position, Shubham has served for Motilal Oswal as Head of Quantitative, Technical & Derivatives Research and as a Technical Analyst at JM Financial.

Tags: #Expert Columns #Technicals

first published: Mar 30, 2024 07:05 am

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Top 3 reasons for why option traders lose money (2024)


Why do people lose money in option trading? ›

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.

Why do 90% of traders lose? ›

Most traders fail because they do not invest enough time and effort in learning about the markets and trading strategies. They enter the market without a proper plan or strategy, which leads them to make poor decisions and lose money. Another reason why traders lose money is because of emotional decisions.

Why do most people fail at options trading? ›

Why Do Most People Fail At Options Trading? Most people fail at options trading because they have not taken the time to learn how options work and how volatility affects options pricing.

Why do traders lose a lot of money? ›

It is either greed or the prospect of controlling vast amounts of money with only a small amount of capital that coerces forex traders to take on such huge and fragile financial risk. For example, at a 100:1 leverage (a rather common leverage ratio), it only takes a -1% change in price to result in a 100% loss.

Why do options lose value? ›

As the time to expiration approaches, the chances of a large enough swing in the underlying's price to bring the contract in-the-money diminishes, along with the premium. This is known as time-decay, whereby all else equal, an option's price will decline over time.

What is the 90% rule in trading? ›

It is a high-stakes game where many are lured by the promise of quick riches but ultimately face harsh realities. One of the harsh realities of trading is the “Rule of 90,” which suggests that 90% of new traders lose 90% of their starting capital within 90 days of their first trade.

Why is option trading difficult? ›

Mathematics: Options trading involves complex mathematical calculations, such as determining potential profits and losses at different points, calculating breakeven points, and understanding the impact of changes in volatility on option prices. Volatility: Volatility can greatly influence option prices.

How much money do day traders with $10,000 accounts make per day on average? ›

On average, day traders with $10,000 accounts can make $200-$600 per day, with skilled traders aiming for 2%-5% returns daily. So, it is possible to achieve a daily profit of $200 to $600 with a $10,000 account.

How do you never lose in option trading? ›

The option sellers stand a greater risk of losses when there is heavy movement in the market. So, if you have sold options, then always try to hedge your position to avoid such losses. For example, if you have sold at the money calls/puts, then try to buy far out of the money calls/puts to hedge your position.

What is the riskiest option strategy? ›

What Is the Riskiest Option Strategy? Selling call options on a stock that is not owned is the riskiest option strategy. This is also known as writing a naked call and selling an uncovered call.

Why you shouldn't trade options? ›

Risking Your Principal. Like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it's possible to lose the entire principal invested, and sometimes more. As an options holder, you risk the entire amount of the premium you pay.

Why do 90 percent of traders lose money? ›

The emotional aspect of trading often leads to irrational decisions like panic selling. When the market moves unfavourably, many traders, especially those who are inexperienced, tend to panic and exit their positions hastily. This panic selling often occurs at the worst possible time, leading to significant losses.

What is the success rate of option trading? ›

The success rate for investors who trade options can range from 50 to 75%. There are various strategies that investors employ to aim for success.

Who are the best day traders in the world? ›

The greatest three traders in the history of trading are George Soros, Michel Burry, and David Tepper. Let us take a very brief look at each of them.

Who loses money when you make money on options? ›

The seller of options wins 95 per cent of the time

Like being the owner of a casino in Vegas, when you sell options, the odds are in your favour. But in the options market you have even better odds than a casino. Practically every option buyer loses money.

Is Option Trading really risky? ›

Options are generally risky, but some options strategies can be relatively low risk and can even enhance your returns as a stock investor. Like stockholders, owners of options can enjoy the potential upside if a stock is acquired at a premium to its value, though they'll have to own the options at the right time.

Why option selling is not profitable? ›

While selling options can generate income from collected premiums, it requires more experience and risk management to limit losses from adverse price moves. Overall, option buyers take on defined, limited risk, while option sellers take on undefined, potentially uncapped risk.

Why do 99 traders lose money? ›

This is one of the most important reasons why most people fail to make money in the markets. Unrealistic expectations. First of all, you're misquoting Zerodha (Nithin). The actual stat was - 99% traders on Zerodha (mostly retail traders) fail to earn more than the risk free rate of return (FD returns used as proxy).


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