What is downside risk in option trading?
Answers:
How in the order of betting the wrong means of access and losing more money than you have to lose?
hahaha, It is close to asking what are the downside risks at Russian roulette.
It depends if you are using buying or selling strategies. There are strategies near predetermined loss / unlimited gain (usually buying), limited loss / limited gain, and unlimited loss / limited gain (usually selling). Probability comes into play next to option as resourcefully. They are not great for daytrading unless you choose the most juice ETF / Index Options, but you might as capably in recent times trade futures later. With an lessons you can fall risk surrounded by your portfolio near option. If you want to trade them revise in black and white first, later start to trade merely one contract at a time.
writing with nothing on call: downside is you lose everything you own..(aka unlimited loss potential)... have you writen 100 contracts on G00GLE at 100 it would in a minute cost you 4,160,000 to get hold of rear to even.
writing covered call: opportunity lost + premium received (you forfeit your shares at the agreed price but you received the premium)
buying call: you lose every penny you invested when the selection expires worthless (which commonly happens)
writing puts: agreed price * number of shares but make the addition of posterior the premium you received... this happen when the stock go ruined... articulate you wrote 10 contracts of American Home Mtg at 10.. and received 1$ per share... you'd in a minute be down $9,000 (had to buy 1000 shares at 10 that are worthless but be compensated $1,000 to do so)
buying puts : every penny when the stock go up and way out expires worthless...
The downside risk is losing adjectives your investment.
The transaction costs for trading option are complex than they are for trading stocks. And this routine that it's harder to fashion money contained by option, even when you are possibly virtuous at predicting adjectives stock prices.
Also, the prices for stock option fade away exponentially over time. And this medium that even if the stock price for some company doesn't amendment much over time. You could still loose big money simply by buying and holding for some time stock option for this company.