Option trading?

typical Trading 212 user using options to ā€œhedgeā€

  • I got 0.49 TSLA shares
  • I am invested in Tesla way too much.
  • Itā€™d be detrimental for my overall portfolio if the share price goes more than 6% down.
  • Let me buy 5% out of the money puts to cover my losses over 5% if it happens.

:point_up:
This does not sound real to me, soā€¦ with all due respect, you are plain out wrong. Iā€™ll have to agree with @Dao (also 1 option contract = 100 sharesā€¦ so fractional options?!? :clown_face::clown_face::clown_face::trolleybus: )

Although ā€œhedging your tradesā€ being one possible usage of options, this is the least effective way of defining them. No one but sizeable institution grade investors will be even using this approach.

On margin, your risk is amplified by yourā€¦ margin (This involves any method of trading with pseudo borrowed money, including CFDs) 2 x Leverage you can loose 2x underlying asset. If the asset moves 3% your investment can move 6-7% depending on the spreads.

On options your risk is amplified by the movement you are buying/selling VS Implied volatility for that strike(delta and the rate of change on delta ā†’ gamma) For example no one expects Coca Cola shares to do ā€œjump movesā€ so it has very low IV. If you are holding a KO Call with an expiration in 2 weeks, and if the price of KO drops 3% tomorrow, it is highly likely that your investment will loose 80-90% for that 3% drop. Because at the end of the expiry you are either in the money or you got 0 (zero)

Just to over complicate things you also can trade options on margin which I highly recommend avoiding. Youā€™ll need significant amount of holdings with a certain percentage liquid to even enable that.

Every day your investment in options will decay (theta) and you are loosing money, constantly unless the underlying asset price is moving towards the trade you made.

Yes it is slightly more complicated than simply buying and selling an instrument on margin, and yes of course you can educate yourself (and you should) but learning these does not make option trading less riskier. It is by far most volatile form of investing.

One saving grace is it looks scary enough to new users and they run away, before doing something senseless. On CFDs, users sees a share that is hyped enough and just hits buy.
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