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Why Buying Options Will Not Make You Money

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A lot of Indian retail option traders buy options in the hope of making money, sorry I was wrong actually they buy options in the hope of making a lot of money (unlimited profits).

Here is one real example of how a trader lost more than 40 lakhs buying options looking for that home-run which never happened. Actually home-run never happens because people book profits much earlier and let the losses run.

Unlimited profits is actually a trap. How many of you have actually made even one trade of unlimited profits? I mean what is unlimited profits? Buying an option for 10 and selling it for 100? Has anyone done that? Or you book your profits much before that? Maybe when its up 20% or 30%. So where are unlimited profits? Please do not fall for such a trap.

Unlimited profits is nothing but another name of GREED. And greedy option traders never make money. Ask me, I was one of those greedy traders. But the stock markets took a lot of money from me to make me realize greed is bad in stock markets.

Similarly unlimited loss is also a trap. Do you think an option seller will leave his sold option open if its losing money? No. But lets leave that topic for another article.

However option buyers have an excuse and that is they think option buying is “limited loss unlimited income strategy”. Yes it is. But the problem is they book profits at 10 points and leave the losses open in the hope the trade will reverse. Unfortunately the option expire worthless. All money gone. Where is the profit?

Option buyers have to get 3 things right:

1. Their timing and direction of the stock price,
2. Their view of the movement and how far the stock travels,
3. Time and volatility.

I should have written 6 actually, but that would have scared option buyers. 🙂

Lets discuss them one by one.

1. Their timing and direction of the stock price:

Option buyer timing has to be perfect when they buy options. As soon as they buy a call option, the stock has to go up. If they buy a put option, the stock has to go down for them to make money.

Let me take an example. At the time of writing this article Nifty is at 6050 (a 1.25% up-move from yesterdays close). Now a call buyers view might be that Nifty might move further 20-50 odd points up. He buys a Nifty JUL13 call option strike price 6000 currently at 78. Now what I mean by the timing has to be right is that Nifty has to go up from here from the time he bought the call option. It’s already 3.20 pm – we are ten minutes away from close.

The buyer may have a target of 10 or 20 points and since ATM options generally have a delta of .50, it is assumed that Nifty has to go up 20 points from here for him to make 10 points profit or has to go up 40 points for him to make 20 points. Note that .50 delta means every 1 point move in Nifty will add .50 points in the ATM call. Similarly .50 we be deducted from the ATM call if Nifty moves down.

What do you think are his chances of success. Forget about what the technical analysis says. Just think about a figure of the success rate. 50%? Yes it is and in that case his probability of winning has already reduced by 50%.

So when you are buying options – your timing has to be right – absolutely right. The stock or the index has to move in the direction of your option from the moment you buy until you book profit.

2. Their view of the movement and how far the stock travels:

If a stock is moving up, or going down – chances are it will continue to do so for sometime and then the trend will change. The problem is we don’t know when. Today Nifty went only up, and closed almost at its peak at 6040 (the 6000 call we bought is already at a loss). The point is the option buyer’s view should be correct and it should hold for quite some time for him to book profits. Remember that time is also eating away the premiums of the options bought. His race is against time too. The stock has to move pretty quickly in the direction the buyer predicted, so that he hits the profit.

Unfortunately most of the times their view is right but timing is wrong. They still lose money. For example, you are thinking that Nifty will move up from here and you bought at call. If your target is 10 points your stop-loss should be also 10 points. What if Nifty hits your stop loss and then starts its upwards journey again? Your view of the movement was right, but in the long term not in the short term but you lost anyway because you cannot keep waiting to see your options expire worthless. If they do you will lose all the money you paid as premium. You have to take a stop loss at some point even if your view was right.

Seeing this many option buyers increase their stop loss points to 20 or 30 points. And increase their target to 20 points too. Can you get the idea? The more money they are losing the more money they are putting at risk. Do you think this is a good idea? Well it may work if you buy more time. Explanation is below. However there are no guarantees.

Another example. What if Nifty stays in a tight range for quite a few days? Only 7 calendar days are left for expiry. Time is eating away your premiums almost 10% a day on an average. Even if your view was right, you will have to take a stop loss just because your premiums were melting away.

So your view of how far the stock will travel, and timing both have to be correct to make a profit when buying options. Chances of success? 50%.

Combining 1 and 2. The chances of success of an option buyer is 25%.

3. Time and Volatility:

If the above 2 were not enough, the option buyers have one more major issue – their prediction of the movement has to come within a specified time else the option premium will melt away. Of course especially for call buyers, when the stock moves up, volatility goes down. For call buyers this can be killing.

They will be frustrated to see that their prediction was right, timing was also right, speed was also right but somehow the options worth is not increasing because the volatility is decreasing.

Lets discuss in details. Just like stocks, no one can predict volatility. Jumps in volatility in the range of 3%-10% are quite common. A 5% jump in volatility can bring in significant changes in the price of an option. Volatility is a friend of an option buyer if it increases, but enemy if it decreases. Usually when the market is trending up the volatility decreases. It also decreases if markets remain calm and stagnant. But they can also increase if it goes up especially when predicting gets difficult. However one thing is for sure, when market falls fast, volatility increases, because there is fear in the markets.

The point here is and I think everyone knows it, if volatility decreases the option values also decreases. So your timing may be right, your view may also be right, but if volatility crunches after you have bought an option – chances are you will still be making a loss. How bad is that?

I have myself witnessed many times call option getting reduced in value even after an increase in the stock price. It will be really frustrating to see your option going down in value even after your view was right and the timing excellent.

Now the big question. How many times can you get all of the 3 points correct? Don’t be disappointed. You can, it is not that every time you will fail. But the failures will be more than the winners and therefore you will not be able to make money buying options.

One thing more. Most retail traders buy ATM (at the money) options. In technical sense, ATM options are the costliest. Why? Because they have the most time value. They have zero intrinsic value and therefore all they are buying is time. If the stock does not move – the option will become worthless. If they buy OTM (out of the money) options, the stock has to travel very far and with high speed for OTM buyers to be successful. How many times will they be successful?

Combining 1, 2 and 3 we can see that the chances of option buyer being successful is only 12.5%. Which means they lose money 8 or more times out of 10 times they trade on an average.

So what you should do when you want to buy options?

1. Buy time too: You should give your options enough time to succeed. For example if you give yourself 60 days of time instead of 30 days – you have a lot of time to make a profit. Agreed 60 days options are costlier, but they give you a chance to succeed. However since you have given yourself time you should also now give the options more room to perform. For example a 20-25 point stop loss and a 40-50 point profit booking whichever comes first. Note that the profit points are double than the losses.

2. Buy when volatility is low: Agreed you cannot time volatility, but if you someday see the volatility has droped considerably, you may go ahead and buy options. When volatility will increase you can realize a profit.

3. Don’t be greedy: Keep booking profits at regular intervals or just keep a trailing stop-loss of profits. Don’t get greedy thinking to book profits when the option price will double. They do happen but sadly you don’t know if your option will double or not. You should look at points and book your profit when it arrives.

Final word: You got to take a call. Sometimes buying options is good. For example when you are sure a stock price will move in any direction sharply, in that case selling options is suicidal. In such a situation you should buy call and put options and wait for the price move and book your profits – still if volatility drop you will lose money.

However under normal market conditions – buying options will not make you money in the long run!

Note: If you are tired of buying options and losing money, I advise you to take my course. I do not promise that you will make 100% returns every month or even a year. But I can promise you that 3-5% a month is possible. I will explain to you very conservative strategies. You will know exactly when to enter and when to exit and book profit. For more information read this or contact me.

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Open ZERO Brokerage FREE Share Trading Account - Buy and Sell Stocks Without Brokerage - Set GTT (Good Till Triggered) Orders on System and Forget

Traditional brokers charge a lot for brokerage; however, this broker does not charge anything for stock buying and selling. Also, you can set GTT (Good Till Triggered) order after buying a stock, so that the system can sell the stock automatically at your target price even if you are not monitoring the market. Only 25k is blocked for option selling with hedge. Also, you get a lifetime free account in Sensibull (virtual trading app & strategy builder) which charges Rs.800/-+GST a month. It takes 5 minutes to open an account online. Click here and Open Free Account with Them Today >>

About the author: Dilip Shaw I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

{ 16 comments… add one }
  • Vijay Kumar May 10, 2015, 3:40 pm

    Hello Dilip ji,

    Your lessons are living pearls for me. The language and the thought process speak volumes on the experience gained by you in the trade.

    However, what appropriate ‘Option Strategy’ should be adopted in the present scenario when Nifty closed at 8191 on 08/05/2015?

    Does Nifty look Bullish or will it resume its journey south?



    • Dilip Shaw May 11, 2015, 2:07 pm

      Thank you for the kind words Vijay.

      >> Does Nifty look Bullish or will it resume its journey south?

      Even experts cannot answer this, who am I? This is the reason why option buyers lose money. Why are you trying to predict the direction of the markets? You are speculating and putting money on the line. For me this is gambling. It will not work. When it does it will be fluke, but you will think you are smart to predict the direction. When it wont you will blame your luck.

      Buying naked options (means buying options without hedge) is the worst trade in the world. Keep doing and keep losing.

      All the Best.

  • Vijay Kumar May 10, 2015, 6:50 pm

    Hello Dilip ji,

    Is the following strategy OK for Monday (11/05/2015)? or beyond?
    1. Nifty 8200 PUT 25 Buy 1 Lot
    2. Nifty 8000 PUT 25 Sell 1 Lot

    The idea is to Buy an ITM PUT to safe guard against any possible fall in the Nifty and if the Nifty moves North ward, the premium of Nifty 8000 Sell Put can be pocketed. But, there is hell lot of difference in the price. Is it worth the trade?
    Please lead my way in to the Option World.
    I am a newbie and have made enough losses in the recent 16 day downtrend.
    Yet, I plan to enroll myself in to your course.



    • Dilip Shaw May 11, 2015, 2:10 pm

      If you are comfortable losing the max loss it is ok to trade this, but again Vijay I warn you to stop gambling. Rest your call. 🙂

  • Vijay Kumar May 11, 2015, 9:39 pm

    Hello Dilip ji,
    Had I gone ahead with the strategy stated above, I would have looked miserable. Some thing kept troubling me about the strategy. I was afraid of the outcome of Nifty, if it started moving north ward, plus that great difference in the price of Call & Put stopped me from placing my bets on!
    As told earlier, I am a newbie for the Options. But, (hopefully) pretty good at learning the things. So far, picked up the tit-bits of Option World from the YouTube & other devices.
    Very soon I shall be knocking at your door to gain knowledge & confidence.


    • Dilip Shaw May 12, 2015, 12:11 pm


      I request you to not leave your mobile number on a public domain. A lot of people unknown to you may get your number from this site which I don’t think you will appreciate. My number is mentioned for visitors of my site to know about the course, but your number may be misused. So I have deleted your number.

      I am very happy that you are learning the tit-bits of options trading. Knowledge is power. Those who have the knowledge will any day be better in a profession or business than those who do not. Option investing is a business. Keep learning. All the Best.

  • Amit Chowdhury July 25, 2015, 8:20 pm

    Thank You So Much Sir… This is what i did and lost money every time.. even i watch open interest and volume continuously of Nifty Future and SBI..

    Thank You Mr Dilip..

    • Dilip Shaw July 26, 2015, 3:35 pm

      Weather you watch open interest, or you do not watch open interest – it does not matter. You will lose money if you buy options, because option buying is pure gambling – and gambling do not work in stock markets. What works is an opportunity identified and acted upon with limited risk – its called taking a calculated risk. Hope it helps.

  • V.S.Rajendiran August 4, 2015, 2:03 pm

    really wonderful and highly worth material. very. informative. Clearly explains reality of stock market. Every new trader should read these materials Tanks .thanks. a lot.

    • Dilip Shaw August 4, 2015, 4:35 pm

      Thanks Mr. Rajendiran. I hope people not just read but understand the dangers of buying options without hedge. Thanks for reading.

  • Dr. A Basu Majumder September 6, 2015, 10:55 am

    Hi Dilip,

    Like many people, I also jumped into the stock market with little knowledge couple of years back. Initially, I started investing in stocks into small quantities and earned profit. I was not a regular trader/investor till December 2014 but in February 2015, I thought to invest more into stock market and trade regularly.

    Accordingly, I opened a new Trading cum Demat A/c with one of the leading Brokerage houses of the country and invested 2 lakhs in option trading. The brokerage house assigned one of their guys to look after my trading. As per the advice of the guy I started trading in options – Nifty and Bank nifty exclusively.

    Initially, I started earning profits in small quantities with buying 2-4 lots of Nifty and Bank nifty out of the money options according to the movement of the market. My trading was fully controlled by my broker and I was happy. The real story began after this, and like others I also started losing money. My broker insisted me to buy 40-50 lots of Nifty and Bank nifty options at a time and I just agreed out of my greed for huge profit. And guess what by April 2015, I lost Rs. 1.5 Lakhs in option buying.

    I was never advised for putting stop loss or hedging them rather provoked for buying large quantities all the time. When I inquired about this huge loss with my broker, the reply was its usual in stock market and it will be recovered.

    By this time, I knew that the assignee had no technical knowledge/strategies of the option trading and it was just a gambling with my money. Anyway, after losing huge amount of money, I became a bit cautious and started net searching for option strategy and come across so many sites and strategies including yours.

    I found your approach quite rational compared to others and started to read your blogs. I told my broker to purchase only 1/2 lots of options as I was addicted to option buying. Most of the time it was naked but at times I asked my broker to put stop loss/hedge.

    However, that didn’t work at all and I started losing money again. Now I am left with 20,000 rupees in my trading account and stopped trading completely learning from my mistakes and greed although my broker insists me for pumping more money into my trading account and continue option trading.

    I want to trade systematically in option trading but don’t have any technical knowledge. Moreover, I can’t give full time to the market and to so many technical tidbits- delta-gamma-theta and so on. I think your course will be the most suitable for me to trade systematically in this market but then again I scare and doubt whether I could able to make it after having it?

    I want to manage risk and want to make money from the market.

    Awaiting for your suggestion and guidance.


    • Dilip Shaw September 7, 2015, 12:06 pm


      That is the exact problem with retail traders. Option buying is a trap that everyone falls for. Its such an easy way to make money. Just buy 1 for 10 and sell for 20 – money doubled. This is an easy way to advertise to people to try option buying and the end result is that almost all of them lose money. But the advertiser or the broker makes money.

      We cant blame them as we are guilty too falling for greed and paying heavily.

      I hope you will stop buying options now at least naked options without hedging.

      Yes with the help of the course you will be able to trade systematically, and not live on hope whenever you trade. You will know when to trade, when to take profits out and what to do if stop loss is hit.

      You will learn to trade with hedging and with discipline. Both are very important trading tools.


  • S.Krishna Kumar June 13, 2019, 4:55 pm

    How long is the conservative options course ?
    Can we successfully trade / hedge to make a small money on a weekly basis
    Do we get any support online while practicing ?
    What is the fees for the course ?

    • Dilip Shaw June 14, 2019, 1:20 pm

      It will take about one month time to understand my strategies. Yes you get support when doing real trades. You and ask me questions via phone/WhatsApp/email to clear doubts while real trades or paper trading.

  • Vijay August 14, 2021, 1:02 am

    Really great sharing!
    As I started options – I am evaluating why/how options buying.
    Luckily I have come across yours!
    Life saving points you gave! Thank you very much!
    actually I am comparing futures trading(buy/self) versus option buying versus option selling
    Yours is great article in this direction! I can relate very much!

    • Dilip Shaw August 14, 2021, 10:52 am

      Thanks Vijay glad you liked the article.

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