Outside of covered calls and straightforward futures, most options trading systematically transfers money from undercapitalized retail to well‑capitalized, hedged professionals because of leverage, complexity, and hidden frictions.[1][2][3][4]
Structural problems with “naked” options
- Buying naked calls/puts is a negative‑expectancy game for most traders because implied volatility and bid‑ask spreads mean you overpay versus realized moves on average.[3][5]
- Selling naked options has theoretically unlimited (or very large) downside and tends to earn small, frequent gains punctuated by rare but devastating losses that wipe out months or years of profits.[4][1]
Multi‑leg “complex” strategies
- Spreads, butterflies, calendars, and condors reduce some tail risk but introduce layers of Greeks and path dependency that many retail traders mismanage.[2][5]
- Academic work on complex options shows retail traders lose heavily even over 1–3 day windows, with average losses above 15% around events like earnings because of leverage and “shrouded risks.”[2][3]
Frictions: costs, slippage, microstructure
- Retail pays wide percentage spreads in options (typical half‑spreads around 8%), which creates a constant drag even when the directional call is right.[3]
- Market makers and wholesalers systematically profit from retail order flow in options; one study estimates retail lost over 4 billion dollars over 2019–2021 after trading costs, while wholesalers captured substantial profits.[3]
Behavioural and risk‑management failures
- Around 85–90% of retail options traders lose money over time, largely due to overconfidence, oversizing, revenge trading, and ignoring cumulative drawdowns.[1][4]
- Prop‑style stats show similar patterns: over 90% fail evaluations, mainly from poor risk management, emotional decisions, and over‑leveraging despite having access to “working” strategies.[6][7]
What is actually defensible
- Strategies that embed options inside a broader portfolio and use them strictly as **hedges** (protective puts, collars) or modest income enhancers (conservative covered calls) can make sense when sized small and rules‑based.[8][5][4]
- Consistent risk caps (e.g., 0.5–1% per trade), strict loss limits, and viewing options as risk‑transfer tools rather than lottery tickets are essential if choosing to do anything beyond covered calls and linear futures.[9][7][8]
Sources
[1] Options Trading Risks: Why Most F&O Traders Lose Money https://www.dozendiamonds.com/options-trading-risks-retail-investors/
[2] Retail investors play a losing game with complex options, according ... https://warrington.ufl.edu/news/retail-investors-play-a-losing-game-with-complex-options-according-to-research/
[3] Retail Options Trading Is Increasing the Volatility of Securities https://www.wealthmanagement.com/equities/retail-options-trading-is-increasing-the-volatility-of-securities
[4] Risks of Options - Bloom https://www.bloomapp.com/learn/lesson/529/
[5] Understanding Options Trading Strategies and How They Work https://rjofutures.rjobrien.com/rjo-university/understanding-options-trading-strategies
[6] Prop Firm Challenges Failure Rate: Why 94% of Traders Fail https://blog.pickmytrade.trade/prop-firm-challenges-failure-rate/
[7] Why 90% of Retail Traders Fail Even with Profitable Trading Strategies https://acy.com/en/market-news/education/reasons-retail-traders-fail-profitable-trading-j-o-194343/
[8] 5 Stock Options Data Strategies for Managing Risk in Trading - Intrinio https://intrinio.com/blog/risk-management-in-options-trading
[9] Basic Guide to Trade Options Intraday: Strategies and Risk ... https://www.interactivebrokers.com/campus/ibkr-quant-news/basic-guide-to-trade-options-intraday-strategies-and-risk-management/
[10] [PDF] Retail Traders in Futures Markets https://www.cftc.gov/sites/default/files/2024-11/Retail_Traders_Futures_V2_new_ada.pdf
