lost money options trading


Jun 29, 2020

With the market’s wild fluctuations in 2020, many novice investors were lured into the stock market with dreams of hitting it big in the stock market. The rise of discount brokerage firms has given many inexperienced investors easy access to the financial markets including the ability to trade options, sometimes exposing them to unlimited risk. Investors with little cash to invest are being educated by discount firms that they may be able to “leverage” their investment in stock by trading options. While some options strategies such as covered calls are relatively safe in that losses are limited, other options strategies can not only wipe out an investor’s account, but can expose that investor to a large debit balance in their account that they cannot afford to repay. Many have suffered investment losses in speculative options trading that they should not have been approved for. While brokerage firms require a customer to fill out questionnaires in order to be approved for options trading, there has recently been criticism of brokerage firms in allowing and approving inexperienced customers to trade options. The online platform Robinhood has committed to beef up its options eligibility requirements and investor education as a result of such criticism. Other firms, such as Fidelity Investments and Schwab have online investor education tools that attempt to inform investors who are trading options. Investors must meet certain criteria to be approved for specific levels of options trading.  Movements in the market caused many options investors who were new to options trading or sophisticated options strategies to not only suffer investment losses but additionally caused them to be on the hook for large margin debits in their accounts. Many did not fully understand or appreciate the risks to which they were exposed. The SEC Has Set Guidelines for Options Trading Approval Before you can trade options, your broker must approve your account for trading. You will have to first fill out your broker’s options agreement by providing information that will assist your broker in determining your knowledge of options and trading strategies, as well as your general investing knowledge and your financial ability to bear the risks of options trading. Based on the information you provide, your broker will determine whether options trading is suitable for you and, if so, what level of options trading may occur in your account. According to the Securities and Exchange Commission (“SEC”), the information you will need to provide in an options agreement generally includes: 1. Investment objectives such as capital preservation, income, growth, or speculation; 2. Trading experience such as the number of years you have been trading stocks and/or options, the number of trades you make per year, the average size of each trade, and information about your general knowledge of investing; 3. Personal financial information such as liquid net worth (investments easily sold for cash), total net worth, annual income, and employment information; and 4. An indication of what types of options you would like to trade. You Need Approval for Options Trading Levels The information you provide allows your brokerage firm to determine which option trading levels if any, you qualify […]

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