By Nathan Peterson, Senior Derivatives Analyst
If you are reading this article there's a good chance that you have never traded options or are just getting started. Regardless of whether you fall into one of those categories or not, this article is meant to highlight some common hazards that may be encountered by options traders and potentially help you avoid them. If you are considering options trading but you don't have a lot of experience trading stocks, I'd suggest gaining more experience with trading stocks before venturing into the world of derivatives.
Options fall into the category of derivatives because their value is "derived" from a different (underlying) asset, such as a stock, index or ETF. However, options are sophisticated instruments and have different risks that you won't find in stocks. Therefore, education and understanding are crucial before placing your first trade or determining whether options are appropriate for you. I'm not trying to deter you from options, because they aren't necessarily riskier than stocks; it's just that you should have an understanding of how they work before engaging any options strategy. The intent of this article is to provide a better understanding of those nuances and potentially help you avoid some of the mistakes highlighted below.