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        Options ABC

        Views 42572023.03.31

        What are the Risks of Options Trading?

        Key Takeaways

        Buyers face a series of risks including loss of premium, loss of value of time, high volatility, liquidity risk, and delivery risk.

        Writers face a series of risks including loss of margin, significant loss, liquidity risk, and delivery risk.


        In options trading, the buyer pays a premium to buy an option. Meanwhile, the writer receives the premium and will be obliged to assume the corresponding obligation. The risks to buyers and writers are different as the rights and obligations to them vary.

        The major risks to the buyer are:

        Loss of premium. If an option contract held by the buyer is still out of the money by the expiration date, the buyer will lose all the premium.

        Loss of time value. As long as an option has not expired, it has a time value.

        With all other factors being equal, the time value of an option becomes worthless as the exercise date approaches.

        High volatility. When the market price of an option deviates significantly from its theoretical value, but the investor still buys it at its market price, as its price returns to its intrinsic value, the investor will bear the loss therefrom.

        Liquidity risk. For some significantly out-of-the-money and less liquid options contracts, the buyer might face the dilemma of trying to liquidate positions but is unable to find a counter-party.

        Delivery risk. Buyers who hold in-the-money options at the exercise date shall exercise their options, which they need to pay the full amount of money or prepare the underlying assets, or will lose premium if not.

        The major risks to option writers are:

        Loss of margin. Option writers are required to pay margin when entering into short positions. When the underlying asset price fluctuates significantly, the writers might be forced to close a position if they fail to add margin in time.

        Significant loss. When the underlying asset price moves against the option writer's expectation, the writer might face a significant loss.

        Liquidity risk. if an option writer writes an option, the writer might be unable to buy underlying assets to make delivery in time or have to face a large bid/ask spread.

        Delivery risk. When an in-the-money option contract expires, if the option writer receives the buyer's request to exercise the option, but is unable to prepare cash or underlying assets within the specified time, it will result in a delivery default and corresponding penalties.

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        Terms and conditions apply right-arrow

        Opening new options positions close to or on their expiration date comes with substantial risk of losses for reasons that include potential volatility of the underlying security and limited time to expiration. Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request.

        This presentation is for informational and educational use only and is not a recommendation or endorsement of any particular investment or investment strategy. Investment information provided in this content is general in nature, strictly for illustrative purposes, and may not be appropriate for all investors. It is provided without respect to individual investors’ financial sophistication, financial situation, investment objectives, investing time horizon, or risk tolerance. You should consider the appropriateness of this information having regard to your relevant personal circumstances before making any investment decisions. Past investment performance does not indicate or guarantee future success. Returns will vary, and all investments carry risks, including loss of principal. Moomoo makes no representation or warranty as to its adequacy, completeness, accuracy or timeliness for any particular purpose of the above content.

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        In the U.S., investment products and services available through the moomoo app are offered by Moomoo Financial Inc., a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a member of Financial Industry Regulatory Authority (FINRA)/Securities Investor Protection Corporation (SIPC).

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