Although some registered representatives and financial firms downplay the risks involved with options trading, in reality, options trading can be an aggressive strategy that may entail high risks. Because of the risks associated with option trading, it is generally only suitable for investors with a high net worth, experience, and an appetite for risk. Brokers, financial advisors, and financial firms sometimes ignore a customer’s tolerance for risk and improperly approve options trading in the customer’s account. Unfortunately, this can lead to tremendous losses in their accounts. RIK recently filed several multi-million-dollar cases on behalf of investors to recover for losses relating to improper options trading.
Options are contracts that grant an investor the right, but not obligation, to buy or sell an underlying asset at a set price on or before a specific date. Options trading has become popular amongst investors in recent years. To be successful, options trading requires research, discipline, and constant market monitoring. This type of trading involves high risk and requires special approval from the financial firm.
From the outset, options trading often comes with excessive fees which incentivizes brokers and advisors to recommend options trading to their clients regardless of the clients’ investment objectives and willingness to take on risk. In doing so, the broker or advisor sometimes downplays the risks associated with an options trading strategy by claiming that the only potential downside is the initial cost of the contract or that the advisor can hedge the position. Both notions can be misleading. First, the investor pays a premium for options in addition to paying high commission fees. This means the investor is at a loss the moment an option is purchased. Secondly, hedging options is highly dependent on market conditions and is an extremely risky strategy in the current volatile market.