ETOs are generally considered risky investments for experienced traders. The risks of trading ETOs include:
- Time decay: ETOs tend to lose value as they approach their expiry date and they are worthless after they expire. That means you could lose your entire investment even if your view of the underlying security later proves correct.
- Leverage: because ETOs cost a fraction of the price of the underlying security, they are highly leveraged. Leverage multiplies your profits when the market moves in your favour, but it can also multiply your losses.
- Writing options: if you decide to write options, rather than simply trading options written by others, you can face potentially unlimited losses. For example, if you write an equity call option, you give someone else the right to buy the underlying shares from you at a fixed price, no matter how high those shares have climbed by the expiry date. Currently, writing options is not available through Bell Direct.