On the road again! Join tastytrade vets Tom, Liz, and Jenny as they venture out live for the first time in over 2 years at Chicago's Vic Theatre.
tastytrade logo
uploaded image

Option Risk - Are Options Riskier Than Stocks?

Apr 7, 2016

By:Josh Fabian

There are more steps and paperwork to trading options as opposed to trading stocks. Brokerage firms tell you this is because there are more risks trading options. But are there really?   

Opening a stock trading/investing account is about as cumbersome as buying an over-the-counter medication. Maybe you need to show I.D., but that’s about the extent of the process. You are trusted to know what you are doing. Want to open an options trading account and it’s more like buying prescription medication.

After opening the stock trading account, you’ll need to fill out forms for options trading. But options accounts come in different varieties. Basic buying of options and selling covered calls is one option. Selling spreads? That’s another option. Want to sell naked options? That’s a third option. And if you want to maximize your money using margin, there’s another step.

Most brokerage firms tell you all these steps are to determine “suitability”. You may be smart enough to save money and understand the benefits of putting that money to work, but someone else entirely will decide what is suitable for you. Apparently, you aren’t that smart.

The added steps required to trade options perpetuate the myth that trading options is riskier than stocks. Is it possible to lose money trading options? Sure. It’s also possible to die from a shark attack on the beach during vacation. Statistically speaking, odds of a shark attack are low. Trading options has risks but those risks are no worse than trading stocks.

Options trading offers some distinct advantages to trading equities. To begin, we can control our entry. We know entering a trade 45 days prior to expiration is the point when theta decay accelerates, an advantage not available in equity trading. We can also choose the appropriate strategy depending on the level of implied volatility.

In an options trade, we can calculate the probability of being profitable. We can also calculate the probability of making 50% of the total premium sold. The only probability in equity trading is a 50/50 chance.

Another distinct advantage unique to options trading is not having to pick direction. Because we can calculate a stock’s expected range in a given period of time, we can sell options with strike prices outside of that range and remain directionally neutral. This gives us the added benefit of not needing to pick the right direction at the right time.

So why the extra hurdles opening an options trading account versus just a regular stock trading account? In a word, control. Complicating the account opening process with additional paperwork gives the illusion options trading is inherently more risky. Additionally, making the process more cumbersome leads many to just give up out of attrition. Both scenarios lead retail investors back to the products controlled by brokerage firms.

None of this is meant to suggest options do not have risk. They do. At tastytrade, we provide our audience with the tools and education needed to understand probabilistic outcomes as well as the mechanics for executing smarter trades. We can’t eliminate risk life or in trading. We just believe in taking smart risk by trading probabilistic outcomes that are not directionally dependent.

Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.