Part 2 Identifying Support and Resistance

Risks in Option Trading

While options offer flexibility, they also come with inherent risks:

Time Decay: Option value erodes as expiry nears, especially for buyers.

High Volatility: Sudden volatility spikes can cause unpredictable price swings.

Leverage Risk: Small movements in the underlying can lead to large gains or losses.

Unlimited Loss Potential for Sellers: Option writers face potentially large losses, especially with uncovered (naked) positions.

Liquidity Risk: Some stock options may have wide bid-ask spreads, making entry and exit difficult.

Proper risk management, position sizing, and stop-loss mechanisms are essential for long-term success.