Trading in the derivatives Future & Options (F&O) segment can be interesting as well as money making but there is an inherited risk that people underestimate and incur the losses. Do you know people lose more money rather than earnings from this segment?

Yes, as per the study by SEBI, 9 out of 10 individual traders incur losses while trading in the F&O segment. I think you have seen a pop-up message on your mobile or computer screen whenever you log into your online trading platform and enter into the F&O segment.

The message also contains, message stating - an average loss maker’s registered net trading loss close to Rs 50,000. And those making the net trading profits, incurred between 15% to 50% of such profits as the transaction cost. Hence, the question here is why people lose money in options trading. Let’s find out the reasons behind such losses.

Why Do Most People Lose Money Trading Options?

Losing money in the financial markets is very common if the market does not move as per your expectations. In options trading, most people lose their money because there are too many complexities, and option premium prices are highly sensitive to price fluctuations.

And people who don't have knowledge and understanding about options trading majorly lose their money. Apart from that, lack of formal trading education and improper risk management are the major reasons behind the losses in options trading.

Moreover, traders, especially those who are new in the market use unreliable sources or information to make the decisions for trading. Social media platforms can be flooded with videos, vlogs, and posts showcasing extravagant profits from options trading.

This influencer shares their fake screenshots showing substantial profiles to allure people. Many people fear missing out and jump into the option market to make huge money in the shortest time and incur losses because they don't have an understanding of trading.

How Many People Lose Money in Option Trading?

It is a fact, in the options market, significant majority of people lose their money but most of them are young investors. As per the study, while analysing the trading accounts of leading brokering houses, around 85% of young traders lose their money within their first year of trading options.

Further, as per Bloomberg's investigation, in the retail segment, option trading revealed that young generation traders lured by high gains quickly are closing their option trade positions into the losses. As per the analysis of the trading of such traders, more than 70% of traders who are new in the market and don't have trading ideas or options are majorly losing their money.

How Much Can you Lose Trading Options?

As per the study by the SEBI, during FY23 and FY24, more than 10 million people in India traded in the F&O segment. And around 93% cent of these traders incurred an average loss of Rs 2 lakh each. These losses are often amplified by high costs, such as brokerage fees and taxes.

Almost all traders who tried their hand at F&O traded options at least once and the report says that 91.5% of small traders who traded with less than Rs 1 lakh lost their money in FY24. As per the report, on average, every trader paid Rs 26,000 as a transaction fee in FY24.

In the past three years from FY22 to FY24, traders together paid Rs 50,000 crore in such transaction costs which has significantly eaten the profits of traders.

However, these losses are often intensified by high costs like brokerage charges and taxes. While the major reasons behind the losses in options are market volatility, transaction costs, small price changes and emotional factors that are not good for option trading.

In option trading, an option buyer cannot lose more than the initial premium paid for the contract, it doesn't matter if the price of the underlying security goes anywhere. Here the risk of the option buyer cannot be more than the amount paid for the option. On the other hand, the loss of the option seller is theoretically unlimited if the price of the underlying security moves unexpectedly.

Also Read: Why Option Selling is Better than Option Buying: Explained

7 Reasons of Losing Money Trading Options:

1. Lack of Knowledge about Options

Option trading is a complex procedure, not easy to understand or implement for everyone, especially for people new in the market or mainly trade in the cash market not in F&O. Such people don't know how options price works, how much the option premium price can be changed when the price of the underlying security changes. Hence, lack of knowledge and experience in trading options is one of the biggest reasons for incurring losses.

2. Underestimating the Time Decay

Every option contract has a fixed date of expiry on which the value of the option premium becomes zero. As soon as the option expiration date comes closer, the price of the option premium loses its value due to time decay.

This time decay is also called the theta, as soon as the expiration date arrives the option premium starts losing its value at a faster speed. The value erodes itself, even if the price of the underlying security doesn't move in any direction resulting in option buyers incurring losses, despite any significant movement in the market or the underlying security.

3. Unexpected Volatility in the Market

The price of the option premium is highly sensitive towards the volatility in the market. A smaller but unexpected movement can highly affect the price of the option premium. On the other hand, if the market remains non-volatile or trades with low volatility, the price of the option premium also remains stable not favourable for the option buyers as they incur the losses.

Also Read: How to Trade in High Volatile Market: Best Trading Strategies

4. Buying the Options at High Premium

While trading in the options, option buyers pay the price for the premium, while sellers receive these premiums. And when traders in a volatile market buy an option contract at a very high price, then it becomes risky for them to make the profits. Usually, traders who buy the option at a high premium incur losses even market moves in any direction.

As the price of the premium of the option, contracts can be influenced by various factors like volatility, expiration duration and the difference between the current price and the strike price of the underlying security at which trade is executed.

Also Read: How to Choose or Pick the Right Strike Price in Option Trading

5. Incurring the High Transaction Cost

Trading in the future and options, you need to pay commission and brokerage fees that eat your transaction cost. And while selling an option contract you have to deposit a major portion of the money as a margin to enter into the trade and this can increase your cost of funds blocked till the option contract expires or liquidate your trade.

And in option, trading to hedge your position you might enter into multiple contracts that will also increase your cost of the transaction. Buying and selling the options frequently also affects the profitability and sometimes when you calculate your overall returns in long-term trading from options such unusual transaction costs you're trading end in losses.

6. Trading with Wrong Strategy

To trade in options you must have a clear and well-defined strategy as per the market conditions and your risk tolerance. Traders who choose to trade with the wrong strategy usually incur losses, as there are various options strategies suitable for different market conditions.

You should choose the bullish,bearish or sideways option strategy according to the market trend. Though, there are more complex option strategies trading with that one you don't understand or not favourable as per the market trend will tend to you in the losses.

Also Read: How to Identify Trend in Stock Market: 10 Points to Find Trend

7. Trade without Risk Management

Trading in the options without proper risk management is like jumping into the ocean without a lifeguard. Traders who use to trade without risk management strategies like not using the stop-loss or entering into the naked positions without hedging can incur huge losses.

Also Read: How to Set Target Price and Stop Loss in Intraday Trading

Trading with stop loss, prevents the trade positions from major losses and hedging the trade positions against each other helps to compensate the losses from one trade position with profit from another trade position, even market moves in any direction.

Also Read: How to Select Best Stock for Option Trading: Points to Consider

How to Avoid Loss in Option Trading?

To maximize the profitability from option trading you need to avoid the losses. Though it is not possible to completely avoid the loss in every option trade if you follow certain rules and disciplines, you can minimize the frequency of losses or avoid the huge losses. A few points are highlighted below that will help you avoid losses in options trade.

Also Read: How to Recover Loss in Option Trading: Tips to Avoid Losses

Use the Position Sizing in Trade

While trading in the options or when you enter into multiple trade positions you should keep an eye on the market trend and as per the changing market conditions you should size your trade positions. It will help you to exit from probable loss-making position and give opportunity to enter into the profitable market trending strategy.

Also Read: How to Decide Best Entry & Exit Points in Intraday Trading

Trade with Hedged Positions

In options, you have options to enter into multiple trades at the same time. Hence, never trade with a naked position, buy, or sell the uncovered calls or puts, you can incur huge losses if the market keeps moving against your expected direction.

Always trade with hedged strategies having both buying and selling options it will counterbalance your trade positions and prevent your trades from huge losses.

Always Trade with Stop-loss

Trading with stop-loss will prevent your trade position from potentially entering into huge losses. When the market not moves as per your expectations, the stop-loss will exit your trade, a position that is usually set a few points below in long positions or above the selling price in short positions.

Check the Level of Volatility

Implied volatility in the market or of a particular underlying security hugely affects the price of the option premium. Hence, while entering into an option trade position you need to pay attention or check the latest volatility level of the underlying security.

Also Read: How to Use Implied Volatility in Options Trading: Strategies

As per the volatility level, you should choose the right trading strategy. When implied volatility is high selling options and when volatility is low buying the options could be a profitable strategy, if the market moves as per your expectations with the same volatility levels.

Avoid Speculative Trades

Never trade on speculation, especially in options, you can incur huge losses. Yes, never make quick decisions based on sudden news or events or influenced by your emotions. Always make trade decisions based on proper research and analysis to avoid losses.

Trade with the Right Strategy

Trading in the options without a well-defined strategy is like shooting in the dark. Yes, always check the market conditions and the latest trends in the market. You can choose from various option strategies like bull spread, bear spread, iron condors, butterflies, straddle and strangle etc.

Conclusion

Nevertheless, the future options can provide you with the wonderful opportunity to trade in the financial markets and make money in the shortest time. But the negative side is most people incur losses, especially those who don't have the knowledge and experience to trade in the options market. Volatility is one of the major factors people underestimate how it affects option prices.

However, if you trade with the right strategy and consider all the factors affecting the option premium price you can make profits. Trade with proper risk management strategies like using the stop-loss and hedged positions to avoid major losses. And the best way is to choose the right online trading platform and trade with the right option strategy as per your risk tolerance.

Also Read: How to Manage or Do Risk Management in Options Trading

However, to minimize the chances of losses in options you can choose to trade with Moneysukh, where you will get recommendations from the market experts to trade with the right timing and strategies as per the market conditions. Here you can open a trading and demat account and also enjoy the best Algo Trading platform like Trade Radar to trade in the option market with the most advanced features to enjoy high-frequency trading at a very affordable cost.

Also Read: Why Choose Algorithmic Software for Options Trading: 10 Reasons