25 Rules of Thumb for Profitable Stock & Option Trades  » Learn More
Investment Risk Warnings - Stock Option Trading Risks - PowerOptions
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Options involve risk and are not suitable for all investors
The content and data we publish is, to the best of our knowledge, valid to the extent of our resources and information-gathering mechanisms. The content is distributed uniformly to all subscribers and no specialized, personalized or individual financial advice is given to any one subscriber or sub-group of subscribers. We cannot assure you that the information is precise or absolute. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Only you can determine what level of risk is appropriate for you. We urge you to seek advice from your professional financial planner/advisor and to make independent investigations before acting on information that we publish. We do not in any way warrant or guarantee the success of any action which you take in reliance on our statements and data.

We encourage our subscribers and non-subscribers to invest carefully and to utilize the information available at the web sites of the Securities and Exchange Commission and the Financial Industry Regulatory Authority. You can review public companies' filings at the SEC's EDGAR page. FINRA has published information on how to invest carefully at its web site.

Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies of this document are available at or from your broker. Copies are also available from the Chicago Board Options Exchange, 400 S. LaSalle Street, Chicago, IL 60605. The OCC Prospectus contains information on options issued by The Options Clearing Corporation. Copies of this document are available, here, and from The Options Clearing Corporation, 440 S. LaSalle Street, 24th Floor, Chicago, IL 60605 or the Chicago Board Options Exchange, 400 S. LaSalle Street, Chicago, IL 60605. The documents available discuss exchange-traded options issued by The Options Clearing Corporation and are intended for educational purposes. No statement in the documents should be construed as a recommendation to buy or sell a security or to provide investment advice. Neither of the above links implies that The Options Clearing Corporation nor the Chicago Board of Options Exchange endorses Power Financial Group Inc. (hereafter, PFG), or its affiliates.

Options behavior in a falling or rising market
In a falling or rising market, it is possible that a option may not change in value at the same rate as the underlying security due to the remaining time value.

Other important information regarding the content on this site.
Any pricing or potential profitability shown does not take into account your trade size, brokerage commissions or taxes, which will affect actual investment returns or losses. Investment examples and comments presented are based solely on our personal research and opinions. Investors should be cautious about any and all stock or option recommendations. All investors are advised to conduct their own independent research into individual stocks or indexes before making a purchase decision. In addition, investors are advised that past stock, index or option performance is no guarantee of future price appreciation or depreciation. Those involved with the preparation and distribution of this web site may have had in the past, may currently hold, or may purchase in the future stock and/or options in companies or indexes discussed in this web site.

Risky Trading Disclaimers & Warnings
  • If you see potential returns for an investment that are much higher than the market normally provides - proceed with caution - high returns are usually too good to be true and you may be trading higher risk than you want to. Risk and reward tend to move together in lock-step - so when you trade seeking high returns you are most likely also taking on higher risk. i.e. There may be something amiss with an investment that has potential to return 20% per year or more.
  • Data/Indicators/Information that is computed based on historical data or past corporate occurences is NOT indicative of future results or occurences. i.e.
    • Just because a stock paid a dividend of a certain amount on a certain day does NOT mean that you can predict what amount or timing another dividend may occur - or that it will occur at all. Companies do not reliably publish dividend dates. You should verify them if your investments depend on them. Be sure you understand the difference between: Declaration Date, Ex-Dividend Date, Record Date and Payable Date.
    • If a stock had an earnings announcement on a certain day of a given amount in the past does NOT mean that date will predict when the next announcement may occur - or that earnings amount will continue. Earnings data can also be tricky because there are many ways to measure earnings and company growth data. And even more ways to make estimates of these numbers.
    • Probability percentages are based on standard statistical equations with assumptions about the volatility and stock pricing behavior in the past. So, in fact, probability is NOT a predictor of what might happen with stock prices or investment results in the future. Beware of extremely high Probability Sum values. Due to constraints in the Black Scholes formula, an extremely high Prob Sum will result after a company has accepted a tender offer, which means that the future volatility of the stock is generally close to zero, and past measures of the stock's volatility -- which are used to calculate the probability -- are no longer relevant. Under these circumstances, a straddle with a Prob Sum of 90% or more likely has almost zero probability of paying off. When considering a Long Straddle or Strangle, ALWAYS verify that the stock is not subject to a corporate buy-out before entering a position.
    • Stock splits or distributions can sometimes create pricing or return calculation problems.
    • Calculated ratios like price/earnings, growth/year, earnings/share etc. are subject to distortions based on the fundamental data used in the calculation. Recent corporate announcements, which change fundamentals, are generally not reflected in historically based ratios. i.e. If a new earnings announcement is released - that will most likely not be reflected in the price/earnings ratio.
    • A tell tail sign that there is an error in the data can be seen when there is a discontinuity in the results column being sorted. An example would be a screen based on probability, which has several result of 99% and then drops to 60%. Those first few results probably have something non-standard or unusual happening. Compare your investment to the similar trades around it to make sure there's no glaring data anomalies like this.
    • These examples and not intended to be inclusive of all data problems or misinterpretation that may occur.
General Rules of Thumb Regarding Risk When You Trade:
  • Some option contracts are not very liquid, which can result in very wide bid/ask spreads and it is possible you will pay or get paid an unfair amount of money to close or open a position. Options may trade below intrinsic value.
  • Most option pricing is done with the use of mathematical models. These models become less reliable as the strike price and time to expiration move further away from the present time and price of the underlying.
  • If you enter a limit order using the mid-point price between bid and ask for a single option transaction or a combination of mid-points pricing for spread trades and multi-leg trades there is no assurance that your trade will be executed. We have observed that only 60% to 70% of the trades entered this way are executed without having to adjust your limit price.
  • Most of the investors we speak with are trading 1 to 10 options contracts - generally less than 20 option contracts in any 1 position. If you are trading 50, 100 or more contracts - be VERY sure you understand the risks of the positions you are trading. In most cases, only accredited investors who have hundreds of thousands of dollars to risk are able to safely trade 50 or more contracts at a time.
  • While options can be used to reduce risk and make a portfolio more conservative - they can also be used to leverage a portfolio - to trade speculatively - to trade aggressively. Be sure when you enter into a trade you understand what kind of trading you can stomach and are comfortable with. Understand your own risk tolerance and risk aversion level and be sure that the trading you do is in-line with that. Be sure you are comfortable with the worst case scenario occuring to your position. Never enter a position without knowing what the worst case scenario (maximum risk) is for that position and if you are comfortable if/when that occurs.
  • If your entire investment portfolio is exclusively invested with options - you may be taking on WAY MORE risk than you should.


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