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?

Bhavika Nehru answered.
3 years ago

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.