A CNBC poll from February 2021 found that over half of investors consider the stock market rigged, and not just rigged, but rigged against them. What about options trading? Is that rigged against investors, too?
Options trading is not necessarily rigged, but to find out, consider the reasons why people think it is. You will need to look at the evidence, including the accessibility of trading to people and the riskiness. Then, make your own opinion about the legitimacy of options.
So, why do nearly half of the investors consider options trading rigged? And how do you decide whether or not it is rigged before you trade options? Read on to learn about the risks behind options trading, why people may consider the market rigged, and how you can protect your portfolio from suffering any huge losses from a rigged options market.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Why Do People Think Options Trading Is Rigged?
Listed below are the three most prominent reasons that give some people the impression that options trading might be rigged:
- Low win-to-loss ratio: The unfortunate part of options trading is that the win to loss percentage with it is much less than any long-term investment like stock and bonds. If you have a diverse options portfolio that includes call options and puts, your win percentage on average is likely to hover around fifty percent at best. This low win-to-loss ratio is primarily driven by options being short-term investments, which makes them riskier.
- Market influence of large players: Another reason people often accuse options trading of being rigged is that to some individual retail investors, it simply appears as though it is. There is a lot of big business and political influence in the financial world. So while some say it may not be completely rigged, they believe it is likely unfavorable towards low-volume retail investors and favors the politicians and large hedge funds profit even more.
- Not everyone can be successful with it: The final reason people consider options trading rigged is that not everyone can participate in it. Like the reason above, only people with wealth and the means to invest money can participate in options trading – and even the stock market for that matter. Additionally, education is necessary for someone to become an investor, especially if you manage your portfolio. Therefore, only people with wealth and education or people with resources can become successful with trading options. While this does not mean that options trading, as a concept, is rigged, these are the biggest reasons that people consider it rigged.
Is Options Trading Risky if It Is Rigged?
Options trading can be very risky if the system is rigged. Options trading can lead to a complete loss if you have the wrong options, meaning you lose one hundred percent of the money you invested in the options.
On the other hand, the gains that you can earn from trading options are essentially limitless since options allow you to buy stocks at leverage with call contracts. Therefore, if the stock price increases greatly and quickly, you can make a huge return in potentially a very short period.
Having unlimited gains compared to a total loss is quite a range. You can be very happy with your option, or be out a lot of money. At the end of the day, options trading can be very risky, especially if it is rigged.
If it is your opinion that options trading is rigged, you can be looking at a lot of complete losses when you do trade options. Therefore, make sure you educate yourself on the options market before investing too much money in this financial instrument. However, below we discuss some of the ways that you can minimize your losses, even in a rigged trading options market.
If you want to learn more about the risks behind options trading, and how you can avoid entering a trade that is too risky, watch this video from Option Alpha on Youtube:
How Do I Avoid Rigged Options?
If you want to trade options but do not want to risk and lose a lot of money, there are a few pieces of expert advice that you can follow. These tips will not prevent you from losing money with options trading, but they can help minimize your losses.
Limit Your Investment in Options
NASDAQ has a lot of educational information about options trading and the stock market in general. One suggestion it often makes is that you should limit how much of your investment portfolio you dedicate to options. You should have no more than 20% of your total portfolio invested in trading options. If you limit the amount of money you invest in options, you will limit the amount of money you put at a higher risk in the options market.
Furthermore, out of that 20%, no more than 20% of your options money should go into a single options transaction. In other words, you should not invest more than 4% (20% of 20%) into a single options trade. This way, if an option is a total loss, you are not taking a huge loss to your investment portfolio.
When you have a small percentage of your portfolio invested in options with the rest invested in less risky investments, you have a smaller chance of losing money that you cannot afford to lose. When you do lose money in options, the gains you have in other, safer investments of your portfolio are also more likely to offset it.
Reevaluate Your Options Strategy
Additionally, if you suffer a total loss from one or two options trades, especially consecutively, you will want to reevaluate your options strategy. This is not to say that your options strategy is bad and you need to change it immediately; however, you should analyze your strategies and see if one would work better for your investing goals and what you are looking to accomplish within your options portfolio.
Finally, there is the possibility of buying and trading something called zero risk options trades.
This video by Option Alpha will help you understand zero risks investing with options, and you can decide if this is something you might be interested in learning about and trading:
Learn About Options Trading and Risk
Once you have decided how rigged or not rigged options trading is, you have to decide whether you want to trade options. If you want to, you need to educate yourself on trading strategies and risk to limit the loss you experience in your investment portfolio, specifically in your options portfolio. Here are some books on Amazon that can help you with just that:
- Options Trading QuickStart Guide. This book is perfect for beginners and seasoned traders who want to learn or refresh their trading options. You will learn about the basics of trading options, how risky options trading can be, and how to minimize your losses.
- The Ultimate Options Trading Strategy Guide for Beginners. As discussed above, having an options trading strategy is crucial if you want to be successful in the options market. This book will help you find the best strategies for your options portfolio, and you can have backup strategies if you need to change your strategy after a few losses.
- Options Trading [5 in 1]. The five-in-one guidebook will walk you through options trading, strategies, how to day trade with options, and how to swing trade with options.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
- Best Trading Courses You Can Take For Free (or at extremely low cost): I reviewed 30+ trading courses to recommend you the best resource, and found Trading Strategies in Emerging Markets Specialization on Coursera to beat every other course on the market. Plus, if you complete this course within 7 days, it will cost you nothing and will be absolutely free! Click Here To Sign Up Today! (If you don’t find this course valuable, you can cancel anytime within the 7 days trial period and pay nothing.)
- Best Passive Investment Platform For Exponential (Potentially) Returns: By enabling passive investments into a Bitcoin ETF, Acorns gives you the best opportunity to make exponential returns on your passive investments. Plus, Acorns is currently offering a $15 bonus for simply singing up to their platform – so that is one opportunity you don’t want to miss! (assuming you are interested in this platform). Click Here To Get $15 Bonus By Signing Up For Acorns Today! (It will take you less than 5 mins to sign up, and it is totally worth it.)
Conclusion
Options trading may not be rigged, but people think it can be since it can be riskier than stock trading. Individuals need a lot of wealth and education to participate in the options market. Some people question how much big business and politics play a role in rigging options trading.
If you do want to trade options, make sure you are well educated before you begin, in addition to not risking too much of your investment portfolio in the options market. If you have a well-thought-out strategy and are researching your options before trading, you can still be successful, regardless of whether or not you think options trading is rigged.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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