It's January and instead of buying the shares you elect to use options. The quoted months for ABC Engineering's call options are March, June, September and December.
March is too near, June is only the beginning of the summer but September covers all the summer and by then your fundamental analysis of the company should mean the shares are considerably higher.
But the takeover didn't come till October and therefore the September call options you bought expired worthless.
You were 100% correct in forecasting the future direction of the shares but lost 100% of your money because your timing was out, in this example by only a few weeks.
In my experience there's nothing that wrong with losing money in the markets when we're just plain wrong - we forecast higher prices but they went lower. But there's nothing more soul destroying than being right and also losing, and that's exactly what happened in the example above.
The point of this is to highlight the fact that if you buy options you have to be right, or nearly right, in two aspects
- Direction, and
And most traders, even the best ones, will tell you that it's the element of timing that's incredibly hard to get right when dealing in the markets (using options or not).