Part 2 Master Candlestick Pattern

1. Liquidity Risk – When You Can’t Exit

Some options, especially far out-of-the-money strikes or illiquid stocks, don’t have enough buyers and sellers. This creates wide bid-ask spreads.

You may be forced to buy at a higher price and sell at a lower price.

In extreme cases, you might not find a counterparty to exit at all.

👉 Example:
Suppose you buy an illiquid stock option at ₹10. The bid is ₹8, and the ask is ₹12. If you want to sell, you may only get ₹8 — losing 20% instantly.

Lesson: Stick to liquid contracts with high open interest and trading volume.

2. Assignment Risk – The Surprise Factor

If you sell (write) options, you carry assignment risk. That means the buyer can exercise the option at any time (in American-style options).

A short call may be assigned if the stock rises sharply.

A short put may be assigned if the stock falls heavily.

👉 Example:
If you sell a put option of Infosys at ₹1,500 strike, and the stock crashes to ₹1,400, you may be forced to buy shares at ₹1,500 — incurring a huge loss.

Lesson: Always be prepared for early exercise if you are a seller.

3. Gap Risk – Overnight Shocks

Markets don’t always move smoothly. They can gap up or down overnight due to global events, earnings, or news. This is gap risk.

If you are holding positions overnight, you cannot control what happens after market close.

Protective stop-losses don’t work in gap openings because the market opens directly at a higher or lower level.

👉 Example:
You sell a call option on a stock at ₹500 strike. Overnight, the company announces stellar results, and the stock opens at ₹550. Your stop-loss at ₹510 is useless — you are already deep in loss.

Lesson: Overnight positions carry additional dangers.

4. Interest Rate and Dividend Risk

Option pricing models also factor in interest rates and dividends.

Rising interest rates generally increase call premiums and reduce put premiums.

Dividends reduce call prices and increase put prices because the stock is expected to fall on ex-dividend date.

For index options or long-dated stock options, ignoring this can lead to mispricing.

5. Psychological Risk – The Human Weakness

Not all risks come from markets. Many come from the trader’s own mind.

Greed: Holding on for bigger profits and losing it all.

Fear: Exiting too early or avoiding trades.

Overtrading: Trying to chase every move.

Revenge trading: Doubling down after a loss.

👉 Example:
A trader makes a profit of ₹20,000 in a day but refuses to book gains, hoping for ₹50,000. By market close, the profit vanishes and turns into a ₹10,000 loss.

Lesson: Emotional discipline is as important as technical knowledge.

6. Systemic & Black Swan Risks

Finally, there are risks no model can predict — sudden wars, pandemics, financial crises, regulatory bans, or exchange outages. These are systemic or Black Swan risks.

👉 Example:
In March 2020 (Covid crash), markets fell 30% in weeks. Option premiums shot up wildly, and many traders were wiped out.

Lesson: Always respect uncertainty. No system is foolproof.