How you can avoid the fate of most retail option traders

livemint.com:

substantial increase in lot sizes. Over time, this may become a market for deep-pocketed investors, those who can afford to take some big risks. So, why do retail traders usually lose money trading options? Why does that not happen with stocks? Well, it’s because stocks are simple, relative to options.

Here’s a tried and tested stock market strategy: buy a diversified index fund and hold on for at least five years. You’re very likely to make a profit. Hold on for ten years, and it is almost guaranteed profit.

Perhaps with some careful analysis, you could do better than an index fund. But it’s easy to at least match the market return with minimal effort on your part. Also Read: How India turned into a trading nation But who wants to wait that long? A big allure of trading options is the possibility of making money fast.

The most liquid options expire in one month or less. Thus, there are ample opportunities to make profit every day. Unfortunately, making money trading options is anything but easy.

When it comes to options, there is no simple profitable strategy. Options are orders of magnitude more complex than stocks. For a single underlying asset, there are call options, put options, a variety of strike prices, and different maturities.

For example, at any given time, you have hundreds of options you could buy or sell for one single underlying asset. Where do you start? Suppose, you expect a stock to rise. You must decide whether to buy a call option or sell a put option.

Next, you need to pick the strike price. And finally, you need to pick the maturity. And even if you’re correct about the stock going up, there’s no guarantee you’ll make a profit.