7. Total Dependence on Wishful Thinking

#TradingTypes101 Trading in Options Contracts – Especially when buying single contracts only (Calls or Puts) – is considered one of the most risky types of trading. Although it is tempting due to the potential for high profits from a small capital, there are several important warnings that must be known before entering into it:

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🔴 The most important warnings when buying single options contracts:

1. Time is against you
• Options contracts have an expiration date, and with each passing day, the price of the contract gradually decreases due to what is known as Time Decay.
• Even if your analysis is correct, if it does not materialize in time, you will lose a significant part or all of the capital invested in the contract.

2. 100% loss potential
• If the contract expires without being “In the Money,” it will become worthless, and you will lose the entire amount you paid to purchase it.
• This is unlike buying a stock, which cannot become worthless unless the stock goes completely bankrupt.

3. The effect of volatility on price (Implied Volatility)
• The price of the option is affected not only by price movement but also by expected volatility (IV).
• A rise in IV may increase the price of the contract, but if it suddenly drops (for example, after an earnings announcement), the contract may decrease even if the stock moves in your favor.

4. Insufficient analysis is not enough
• Trend analysis alone is not sufficient for a successful options trade; it is essential to understand:
• Time levels
• Volatility level
• The distance between the stock price and the strike price
• Choosing the appropriate duration