Options University Courses

If you are one who lost huge money on the stock options trading, you are not alone. Most of people lost their entire trading account just trading stocks. Regardless of their hard work, people always seem to lose money eventually even though they made some initial profits. Why do this happen?

The truth is simple-stock options trading is the risky business. You may ask: Why is it such a risky business? Stock trading proves to be risky for many people because they could lose entire money on a stock trade if stock options close out of the money during expiration.

There is always risk with stock options. Even the stocks that seem to be going up very quickly could take a u-turn suddenly and there could be unexpected drops close to expiration.

If that happens, it will take your in the money call options even before you can react to it. Implying that no matter how careful and certain you are, in stock trading there is always the possibility of a complete loss.

Though stock options offer excellent investment instruments, but if you tend to throw all your cash into the stocks and hope to strike a jackpot, stock options trading could be very fatal for your financial health.

But how can we avoid such a loss? Simply apply the low risk principle of stock options trading. According to this rule:

Invest the Money You Can Afford to Lose
Yes, this is the golden rule of investments that enables you to avoid huge loses. For instance, if you can afford to lose only 20% of your money, you should invest no more than 20% of your wealth on a single stock trade.

This rule is even more important if you are trading in out of the money options that have very high chances of expiring worthless. For instance, if you own a $50000 account and you can’t afford to lose more than $5000; this is the amount you should invest on a single stock trade. It’s as simple as that!

The disadvantage of the rule is that investor will not be able to make that much money, incase stock price goes high; he would have if he had punted entire money on that particular stock.

The logic behind this rule is that just like you should never bet all the money on a single gamble, you should also never invest all your money into a single trade. In fact, this rule is applicable to every kind of trade.

For people, it’s not easy to stick to this rule, especially when they are “on a roll”.  It’s easy to understand that there never is a problem with making money somewhat less but losing entire money is certainly a big problem.

So, stick this golden rule and use only money that you could afford to lose easily in stock options trading and you can sleep far better knowing that you haven’t and cannot lose more than what you have expected to lose.