Risk Disclosure

Overview

Options trading involves complexity and substantial risk. This page discloses key risks associated with covered calls, cash-secured puts, wheel strategy, and options trading in general. This disclosure is educational and does not cover all possible risks.

Options Are Complex Instruments

Options derive their value from an underlying stock, index, or commodity. Understanding how options work—including strike prices, expiration dates, Greeks (delta, gamma, theta, vega), and exercise/assignment mechanics—is essential. Misunderstanding options can lead to significant losses.

Covered Call Risks

• Upside cap: If the stock rises significantly, your shares may be called away at the strike price, capping your gains.
• Assignment: You may be assigned early (before expiration), especially around dividend ex-dates or if the option goes deep in-the-money.
• Opportunity cost: While collecting premium, you forgo the full upside potential of the stock.
• Stock price drops: The premium collected may not fully offset losses if the stock falls sharply.

Cash-Secured Put Risks

• Assignment: If assigned, you own 100 shares at the strike price. You must have sufficient capital to purchase the shares.
• Stock price drops: Even after being assigned, the stock may continue falling, resulting in paper losses.
• Capital lockup: Cash reserved for a put is not available for other uses until the option expires or is closed.
• Early assignment: You may be assigned before expiration, especially if the put is deep in-the-money.

Wheel Strategy Risks

The wheel strategy combines covered calls and cash-secured puts. Risks include repeated market exposure, assignment cycles, emotional decision-making, and the cumulative effect of multiple trades over time.

Earnings Risk

Around earnings dates, stocks often experience larger-than-normal price moves. IV (implied volatility) can spike before earnings and collapse afterward (IV crush). Options sold before earnings can face assignment during gaps. Options sold after earnings may lose value faster than expected.

Liquidity and Bid/Ask Spread Risk

Not all stocks have liquid options. Wider bid/ask spreads mean worse execution prices. You may have difficulty closing positions quickly, especially in low-volume options or during market stress.

Volatility Risk

IV (implied volatility) can move sharply. A drop in IV can reduce option premiums significantly. Holding short options during IV spikes, then IV crush, can affect profitability.

Gap and Gap-Down Risk

Stocks can gap down overnight (e.g., on earnings misses, news events, or market wide downturns). A short put sold at $150 can gap down to $130 overnight, resulting in immediate losses even if you were assigned.

Early Exercise Risk

American-style options can be exercised before expiration. Holders of calls or puts may exercise early, resulting in assignment before expected.

Psychological and Behavioral Risk

Options trading can be emotionally taxing. Fear of assignment, FOMO, or desperation to "recover" losses can lead to poor decisions. Discipline and pre-planned strategies are essential.

Regulatory and Tax Risk

Options trading is subject to tax implications (short-term capital gains, wash sales, etc.). Consult a tax professional. Regulatory rules (PDT, etc.) may apply to your account.

Data Is Educational Only

All data, examples, and historical performance on the OptionLeo Site are for educational purposes only. They do not constitute predictions of future results. Do not make trading decisions based solely on this data. Verify all information through authoritative sources.