What Are the Potential Risks Associated with Trading Options? - Transcript

Trading options can be an exciting way to diversify your investment strategy, but any option-trading strategy is not without significant risks. Whether you’re engaging in covered call strategies or more speculative naked options writing, understanding the potential pitfalls is critical. At Malecki Law, we’ve seen firsthand how improper guidance and/or a lack of disclosure about these risks can lead to financial losses for investors.

A covered call strategy involves holding a stock and selling call options against it. While this strategy is considered less risky than naked options writing, it still comes with potential downsides. The primary risks include:

• Losing the Underlying Stock: If the stock’s price rises significantly and the call option is exercised, you may be forced to sell the stock. This could result in missing out on future gains or losing a position you intended to hold long-term.
• Tax Consequences: Selling the stock as part of a covered call strategy could trigger tax liabilities, including capital gains taxes.
• Limited Upside Potential: By selling a call option, you cap your upside potential. If the stock’s price surges, your gains will be limited to the premium received and the strike price of the option.

While covered calls can provide steady income through premiums, they require careful planning and an understanding of the potential consequences of losing your stock.

Naked options writing—selling call or put options without holding the underlying asset—is a high-risk strategy that can lead to substantial losses. The risks include:

• Unlimited Losses on Calls: If you sell a call option without owning the underlying stock, you may be forced to purchase the stock in a rising market. Since there is no ceiling on how high a stock price can go, your losses could be unlimited.
• Potentially Significant Losses on Puts: Selling put options exposes you to the risk of having to buy the underlying stock at the strike price. If the stock’s value plummets to zero, you could lose 100% of your investment.
• Margin Calls: Naked options require a margin account, and significant losses can trigger margin calls, forcing you to deposit additional funds to maintain your position.

Given the speculative nature of naked options writing, it is often compared to betting. Without proper safeguards and a clear understanding of the risks, this strategy can quickly lead to financial ruin.

When trading options, your broker or financial advisor has a duty to fully disclose the risks associated with these strategies. Unfortunately, we often see cases where investors are not adequately informed, leading to unexpected losses. Brokers must ensure that the strategies they recommend align with your best interests, including risk tolerance, financial goals, and investment knowledge.

If a broker fails to disclose these risks or misrepresents the potential outcomes of trading options, they may be held accountable for negligence or misconduct. At Malecki Law, we specialize in representing investors who have suffered losses due to improper guidance or insufficient disclosure.

To mitigate the risks of trading options, consider the following steps:

• Understand the Strategy: Before engaging in any options trading, ensure you fully understand how the strategy works and the associated risks.
• Assess Your Risk Tolerance: Options trading is not suitable for every investor. Be honest about your risk tolerance and financial goals.
• Work with Trusted Professionals: Choose a broker or financial adviser who has a proven track record of transparency and adherence to regulatory standards.
• Monitor Your Positions: Regularly review your options positions to ensure they align with your investment objectives and market conditions.

If you’ve experienced losses due to misleading advice or improper handling of your options trading account, Malecki Law is here to help. Our experienced securities attorneys understand the complexities of options trading and the obligations brokers have to their clients. We work tirelessly to hold financial professionals accountable and recover losses for our clients. Call Malecki Law at (212) 943-1233 or contact us online for a consultation.

Transcript:

The risks on a covered call strategy are the risk of losing the stock that you own and facing the consequences of that risk whether there be tax consequences losing a position you really wanted to hold having to uh to Forfeit on premiums if you’re not using options that you’re buying the real risk is around naked uh call writing so that means you don’t have the stock and you really need to go into the marketplace and buy the stock so if it’s a call you have to go in and buy it in a rising market and there’s no ceiling on how high the price could go I within reason um if it’s a put you know you may be buying something that is going to go to zero so you may lose a hundred percent of whatever the investment is and you could lose a lot more in options writing than you’ve invested in the options so those are real risks it is a betting strategy.