Options are often called the “magic tool of financial markets”. They allow investors to use small capital to leverage unlimited profit potential. But in the view of Gregory Russell Hawthorne—known by students as the “WiseOwl”there is no free lunch in the market. Option buyers may seem to have the right to unlimited gains, but they also face four major risks.
In one public lecture, Russell Hawthorne explained in simple terms, the traps most easily overlooked by buyers.
1. Loss of Premium: The Most Certain Risk
“Buy for an uptrend and it does not rise, buy for a downtrend and it does not fall,” Russell Hawthorne said directly.
Option buyers must pay the premium first, this is the ticket to enter the game. If at expiration there is no intrinsic value (for calls, the underlying price is below the strike, for puts, the underlying price is above the strike), the contract expires worthless and the buyer loses the full premium.
In other words, maximum loss = premium, this is the basic risk that buyers cannot escape.
2. Time Decay: The Silent “Invisible Killer”
Options are not permanent, they are contracts with expiration. As expiration approaches, time value continuously decays.
Russell Hawthorne gave an example:
You are bullish on a stock and buy a call option with only 3 days left, priced at $9.
On the first day, the stock hardly moves, and the option price drops to $6, just from time decay, you lose 33%.
Even if later the stock rises as expected, if the move is not big enough to cover the loss from time decay, you still lose money.
“This is why people fear near-expiry options, because they are like sand in an hourglass, flowing away silently.” Russell Hawthorne explained.
3. Lack of Market Momentum: The Direction is Right, But No Profit
Option pricing depends on volatility. If the market lacks enough momentum, even when the price moves in the expected direction, the move may not be enough to cover the premium.
Russell Hawthorne summarized: “The direction is right, but the magnitude is not enough, in the options world, this means wasted effort.”
4. Implied Volatility Risk: The Unseen Driver of Prices
Option prices depend not only on the underlying price, but also on implied volatility. If the market expects lower future volatility, implied volatility falls and option prices decline.
This means that, even if the underlying rises as you expected, if implied volatility drops, your option position may still lose value.
At the end of the lecture, Russell Hawthorne reminded students:
“As an option buyer, you pay tuition first (the premium). If the market does not give you an opportunity, that money is gone. More dangerously, time decay and volatility, these invisible factors, will eat into your profit where you cannot see.”
Therefore, while option buyers have unlimited profit potential, the success rate and the entry threshold are both higher than in regular trading. Russell Hawthorne emphasized: “Options are not a casino, but a precise tool. Only those who truly understand them can turn them into wings of wealth rather than traps of loss.”