With any business venture there are always risks - and the risks of options trading are no different. Understanding these risks is crucial to successful trading. In fact, launching boldly into the world of options trading without knowing what you're up against, is like a business without a strategy or sense of direction.If you want to make a regular income from option trading you have to approach it with the mindset of a businessperson. You have to do your SWOT analysis - strengths, weaknesses, opportunities and threats. This article is primarily about the "weaknesses and threats" aspect.

Enemy Number One - Time Decay
Options are unlike any other derivative financial instrument in that their value decays with the passing of time. During the final 30 days of an options life, its value decays at a much faster and more exponential rate than in all its previous life. You need to be aware of this, the most notorious of all the risks of options trading, and use it to your advantage when implementing your option trading strategies.
If you know who your enemy is, you can not only avoid the dangers of approaching it the wrong way, but in the world of options trading, you can also turn this enemy into your best friend.
One of the great advantages of options trading is that you can not only BUY option contracts, but also create new ones out of nothing and SELL them to the market. We call the 'buying' end 'going long' while the 'selling end' is 'going short'. Most of the risks of options trading fall into the lap of those who 'go long' options, due to the disease of time decay.



If you buy options in the hope of selling for a profit, you need to feel sure that the underlying stock, commodity of whatever, will move to your desired target reasonably quickly, otherwise time decay will eat into your profits. There are ways to minimise this, such as buying "deep-in-the-money" options, where most of their value is "intrinsic value" and less "time value". Another alternative is to purchase long-dated options, i.e. with an expiry date at least 90 days away. This will give you more time to be right and provided they are 'in-the-money' will be less affected by time decay.