This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.

Make sure you’re aware of these option concepts before trading them.

Options are a zero-sum game. You don’t own the underlying, so you don’t receive dividends from a business or interest payments from a debtor. In order for you to make money, the counterparty must lose. Keep in mind that you are speculating against highly sophisticated market makers and other market participants that don’t like to lose money. You have to have a strong edge to beat these opponents.

Options are used to speculate against volatility levels as well as the direction of the underlying. If you’re unsure of how volatility plays out in the market don’t attempt to trade options. You will lose.

Options allow you to make a leveraged bet on the direction of underlying stocks. This leverage can create incredible returns, but at the same time has the ability to bankrupt your account.

If you are using the option as a directional bet you need to have an edge in the underlying to win, the option itself won’t add any value to the trade. It can actually take away value from the trade if you are overpaying from a volatility perspective.

Finally, options are costly to trade. Commissions add up and the bid ask spread is wide — both of these costs will eat into your P&L and this cost increases significantly if you trade options on small timeframes.

To learn more, make sure you watch the video above!

And as always, stay Fallible out there investors!

Follow AK on Twitter:
***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE.

By Steve Burns

After a lifelong fascination with financial markets, Steve began investing in 1993 and trading his accounts in 1995. It was love at first trade. After more than 30 successful years in the markets, Steve now dedicates his time to helping traders improve their psychology and profitability. New Trader U offers an extensive blog resource with more than 4,000 original articles, online courses, and best-selling books covering various topics.