InvestorQ : Are there any specific risks that I must avoid while buying options?
Bhavika Nehru made post

Are there any specific risks that I must avoid while buying options?

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Bhavika Nehru answered.
3 years ago
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Stop being influenced by what other large traders are doing in the market because you don’t know why they are doing it. There are those eager beaver traders who buy a certain option just because a particular institution or star trader bought it. Perish that thought. You don’t know what is behind their trade. Also don’t buy a call option, the moment you are convinced about the fundamentals of a stock. It may take 3 years for the stock price to fructify. By then your options cost may well and truly finish you. Avoid the bandwagon strategy while buying options.

A cheap option or an option with a low premium is not necessarily valuable. It is most likely cheap because that is what it is worth. Averaging is a cardinal sin. An option trader once told me that he had reduced his risk in an option by buying on every dip. That is a myth. While your average cost of holding may have come down, your concentration risk is substantially up. Be cautious of illiquid options for two reasons. Firstly there is a danger of no exit and secondly, it normally attracts regulatory scrutiny as SEBI constantly keeps investigating the reasons for action in illiquid options.

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