Cheap options that end up worth nothing

It costs very little per unit, which is the first thing you notice. A full lot of it costs less than a small position in almost anything else, so the number on the order window does not frighten you. You take it because the most you can lose is what you paid, and because if it works, it works properly. Then expiry arrives and the contract is worth nothing, and what is gone is not a fraction of what you put in. It is all of it.

Why cheap and small are not the same thing

An option is a contract with an end date. At expiry it settles on where the price actually is, and if the price has not gone past your strike, there is nothing left in it. That is not a forecast. It is what the contract says. The premium you paid is the whole position, and at expiry the whole position is what is at stake.

Cheap also means something before you buy. A premium is a price, not a discount. It is what that contract costs today, and the contract it buys you comes with its own strike and its own end date. Those two decide whether anything is left at expiry, and neither of them is smaller because the premium was.

The arithmetic of getting your money back is fixed from the moment you buy, as well. The price has to go past your strike and then far enough to cover the premium and the charges before you are level. You can work that figure out before you place the order, on your own numbers, in about a minute. Nothing about the market goes into it. In your own trades it reads like this.

• The premium per unit was small, and that is the reason you would give for the size.
• You held it to expiry rather than closing it, because there was so little left to lose.
• You bought a strike further out than the one you first looked at, because the nearer one cost more than you wanted to pay.
• You know what you paid. You have never worked out how far the price had to go for you to break even.
• Several of these in the same month ended with nothing in them.
• You would not have put the same rupee amount into a single position in anything else.

Counting it from your own records

Download your trade book for the last three months and keep only your option buys. For each one, note the premium you paid and how it ended: closed by you, or held to expiry. Add up the premium on the ones held to expiry that ended with nothing in them. That total is one number, and it is addition rather than interpretation.

Then do the breakeven on each of them from your own rows. The premium you paid, plus the charges on both sides, is what the price had to produce before you were level. Write that figure next to each trade. You now have, for every one of them, the distance it needed and whether it got there.

If you have set yourself a limit on how much of your capital goes into contracts that can end at nothing, count how many of those months came in above it. The limit is yours to set. The count only ever measures your orders against your own number.