What are the risks that are involved in Opts trading ? Looking to make a list here

T

traderwald

Hi guys,

I am looking to know what are the risks involved in trading options as I have understood a few of those here on this forum. Request the Opts experts and others to please help make a list of risks that are involved in option trading based on their learning and expertise. This is mainly intended to understand those risks which are not known by simply reading the definitions but from actual practical trading or in-depth reading:

Here are some risks that learned from reading here and some paper account trading:

1. When you write an option you need ensure there is sufficient margin in the account for assignment.

2. If you write a call on a harf to borrow share, then it could result high borrowing fees. This is however not applicable to ES and other Futs such as commodities

3. An Opt can be exercised in after market trading hours - hence it may be good to close any open positions on short options rather than looking to allow them go to 0.

4. If you are in a credit spread, it is possible that the Short Opt leg is ITM and hence gets assigned - need to ensure margin is there in the account for that.

Please add the risks you know to this so it can be helpful to newbies and others to understand the intricacies of trading options
 
Throw one out - Understand the risk in European option spreads - most firms now margin as the short side is a pure naked.
 
This is a good resource to familiarize w/Options risks.

Learn the TIMS model. Perhaps the STANS model too if you're gonna Cross-Margin.

Download their .xls file, play with it, changed it, customize it...etc. At least you'll know whether your broker is going by OCC or using their own risk metrics. Might wish to change brokers if need be. All or that...none of that.

G/L

https://www.theocc.com/risk-management/
 
Thank you for the replies guys.

Adding 2 more risks below:

5. Options can spike or gap in a big range during outside the regular trading and cause assignment or exercise and margin related ,and then trade at regular price in the next trading session. (Please correct if this is wrong)

6. Check for the option Open Interest (and volume) to ensure liquidity in the mkt because the spreads could become wide if the liquidity is low when looking to close the trade for this.

Please add more or add any comments you may have.
 
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