No, You Aren’t Going to Get Rich by Options Trading
jacobin.com
jacobin.com
Are index funds going to make me crazy-bonkers-rich? No, but neither was anything else in all likelihood.
What they’re brilliant at is giving me my time and attention back. They’re low risk/reward, and they’re boring. Just like me, as it turns out. Toast to Jack Bogle.
For me, I’ve learned that modest returns over a long period (that I never have to think about) are good enough :-)
I did learn a lot about the stock market while doing options though, so I guess that is a plus.
It was like that but not as often as I expected. For example, intraday movements could often happen at very predictable times. It can also be very cargo cult. Things like technical analysis seem to work (until they don't) only because enough people believe they will, so the signal to noise ratio can be very hard to suss out.
Ultimately the time required and risk tolerance for those moonshot chances just didn't add up.
Exactly this. I played options for a while, just with my lunch money, because it was fun. But it quickly consumes your life, you have to stay on top of it all the time. The stress is what made me stop doing it.
It's a trap to follow the advice of investment savvy people that recommend higher risk options without taking into consideration the energy it takes to properly manage risky investments if someone isn't doing it for you. They falsely assume that what works for them (higher risk/return investments and closely following the markets for signals) is what also works for normal people that don't follow markets and financial news very much at all. They mean well and are genuinely trying to help people make the most money possible, but it's a huge blind spot that the time/energy/attention costs of investing aren't also taken into consideration.
It's the same reason I wouldn't recommend Linux to someone that isn't motivated enough to learn how to use it. It definitely can maximize what you get from your computer, but only at the expense of requiring more responsibility and time to learn how it works. Though, it's far easier to get solid Linux advice than solid investment advice and a bad financial decision is way harder to recover from than a bad technology choice.
I'm a little sore from the market this year (but less this morning, when my ITOT total US stock market index ETF blipped up 4.8%). And I kinda regret that all my AGG (US bonds index ETF) followed advice to be placed in a tax-advantaged account (where it not only didn't take the edge off equities being down, but I can't even tax loss harvest it).
But Bogleheads is still looking like the best school of thought.
Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait.
Want to sell that tech stock you've been holding once it doubles? Forget your limit order, that's for the boomers over at vanguard. Sell a call today!
For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order).
If it doesn't hit 90, you still pocket the premium.
It's like getting paid for having a limit order.
It's getting paid for taking on risk. A limit order will execute at your level or better, not worse.
There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price.
The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.
If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted.
If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium.
The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable
Investment banks usually trade in volatility space, also called delta hedged. Main idea they would sell options (calls or puts) by adding extra premium to the fair price. At the same time they make the whole portfolio delta neutral by buying and selling underlying instruments on daily basis. By having significant portfolio one could expect to leak less on the hedging process and may be use some correlation between underlyings and use index futures instead of individual stocks. The whole business is to capture the premium mentioned above without predicting up or down move.
This is not risk free:)
In your scenario you can either buy the stock at your entry price, call it $100
If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario.
You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put.
There is nothing risk free going on here:)
Especially Cash secured puts.
The moment you write the put, you are explicitly stating when you buy the stock, if the put ends in the money, as dictated by the expiry.
And if the stock dips far below that amount by the expiry then you have alot of downside that you wouldn't have had if you didn't write the put.
Nothing is free, you write a put and the stock goes down you end up owning the stock that you are ownings at a loss from day one.
As you near retirement age you'll want to slide it towards a more conservative mix; you don't want a 50% stock market crash to add a decade to your career.
I’m not an expert so someone correct any of this that is wrong, but there are broadly speaking two types of funds:
Accumulation and Distribution
Accumulation funds will do the reinvesting internally, so they really are set-it-and-forget-it vehicles.
(Distribution units hold the dividend returns as cash, i dont use these, I’m not really sure why anyone would but I assume there’s a tax reason somewhere).
Is this sorta like a Buffett rule thing?
The idea is just: invest in an index fund, highly diversified, cheap. There are some variations, like using an equity and bond split, but you can just get a world all cap stock ETF and sit back.
That's all. It's hard to accept you don't need to know more than this, but it's what most people should be doing.
else, the forums are where a ton of folks hang out and discuss the minutiae of being boring ;) - https://www.bogleheads.org/forum/index.php
An index fund is as close as investing gets to a savings account. It’s not a savings account, and will go down if the market does - but the logic is that unless you think it’s the end of the world then it will recover. So you just play the long game and end up retired comfortably (and probably early, depending on when you start and how hard you go at it).
Put the 8% you can reasonably expect into a compound return calculator and it’ll give an idea of what to expect. It’s not clairvoyance though - things (good and bad) will happen along the way and the numbers will adjust accordingly from the guesstimate.
There are already a lot of real professional trading desks doing this. How can you compete with them?
For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50.
Now, imagine you queue in your way out limit sell order at $200, and then some unsophisticated trader submits their limit buy order at $201. Your limit sell won't trigger, until the entire queue of sell orders sorted by increasing prices (starting at $150.50) gets filled first. If that unsophisticated trader wanted just one share, they will get that one share at $150.50.
The whole idea of a limit buy order at $201 is that it will execute at the cheapest available price, as long as it is below $201. Similarly with limit sell orders, your $200 limit sell will execute only at the edge of bid-ask gap price, as long as the cheapest available ask is at $200 and meets the bid at that number. Until that moment, for every buyer, the queue will be processing all the cheaper ask prices first, until it chews through all of them (which would pump the stock enough to reach your limit sell price).
If you are an unsophisticated maker, you have to quote wider, and yes you will probably get hit very very rarely. But occasionally someone comes through and just needs to unload something as quick as possible, and they will put in a market order to basically take the whole one side of the book and trade down to your level.
Obviously not super profitable, but not losing either! If I knew an easy way to make markets as a retail trader and be wildly successful, I wouldn't blab about it ;)
(this rule applies well to a lot of professions, not just high finance)
It takes seeing how some of the second-order effects matter in order to get an inkling of just how much you don't know.
As an approximate programming example, imagine the difference in productivity between a programmer coming out of high school and someone with a couple decades experience with access to version-control, profilers, documentation, a clear understanding of best-practices, who works on a team of five people who will all do the same job, and has access to $1M in AWS credits.
Can the young programmer compete? In principle. Can they deliver on time, every time, for their clients without making a gaffe like the team of programmers can? Probably not.
The goal of a market maker is to trade as much as possible, on either side of the book, with the widest possible spread that remains competitive, while keeping within risk limits.
Most retail option strategies are based on beliefs about the behaviors of the underlying. Like, I think this stock is going to go up, so I'm going to trade a strategy that makes money when that happens (probably with some leverage, and hopefully with some downside protection).
They're not thinking about smile and calibrating stochastic volatility models and looking at their cross gamma and trading OTC exotics to lay-off their risk.
One strategy depends on discipline, scale, operational excellence, deep quantitative analysis and risk management. The other depends on clairvoyance.
does a lot of the "technical analysis" (support/resistance, moving average crossover, volume/volume weighted average price, etc.) become a self-fulfilling prophecy?
there are other members that make up the market + its daily volume other than market makers. i agree, it isn't (or at least shouldn't be seen as) market makers vs retail traders. market makers don't care about direction from what i understand.
it's the high frequency trading hedge funds/funds running algorithms against institutional "whale" investors versus... i'm not even sure i can pretend to understand all of the participants that trade shares (or options) daily/weekly/monthly/quarterly.
there's a portion of psychology manipulation to it as well, right? "oh my gosh, this is going up but it might be a bull trap" aka... some people believe there are entities/an entity behind the scenes driving the price up to "suck people in", and vice versa (bear trap).
The market makers and other participants are not playing the same game, but they are playing in the same market; and that is ultimately zero-sum. If the market makers are making money on your transaction costs, and they're profitable (which they are) then there's already some signal there, surely?
Is there any wiggle room in that statement for the alternative? If retail options traders come out ahead winning overall 15% of the time... is that worth pouring time into? It becomes a personal decision on whether you should risk your resources/time given those odds.
The question I have is... why do some people win and some people lose? It can't just be luck.
Even the absolute rock star traders have a nasty habit of regressing to the mean on a long enough time line.
It just turns out that when you have a several million participants - some of them have "a long enough time line" of 30+ years.
...well, luck or insider trading.
Given this, you can see why there are just actual purely statistical reasons for tons of trades going well with zero insider trading needed for that. Half of them are bound to do well. Whether you can consistently stay on the "good side" of your trades is a separate story, though.
P.S. Not trying to deny that insider trading exists, but its prevalency tends to be extremely overblown.
I'm not sure this is such a good idea.
Professional companies that do equity options market making have major natural advantages over you:
- They are at the front of the line of any order if they're on the NBBO, so they're going to capture the spread
- They get order flow from offline brokers, which tends to be high volume and have higher edge
- They do gobs of volume every day and hope to make a fraction of a penny per transaction.
- A typical market maker makes markets in 500+ stocks at any one time. Good luck doing that on your own.
- They've invested in being as physically close to the actual exchanges as possible so that they can be first to respond
- They're rarely greeks neutral beyond delta
- As registered market makers, they have tax advantages you do not
Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn't carry any other greeks.
I've seen speculators do this, but they're playing with fire. I've seen an investor risk 9 digits to pick up $50k a minute before strike expiration, not realizing that the actual settlement is the next day (so adversarial events can still happen).
These tail risks are impossible to predict, and volatility of volatility of these events is incredibly high. So your expected value is better to think of as a "very broad range with a positive mean" - are you comfortable with this?
... generally that refers to the strategy of writing (far) OTM options.
Like: the Dow is currently trading at about $49.44; and the bid/ask on a Nov 18th put with a strike of $40.00 last traded at $0.04. So you can write 25,000 of those and get $1,000 in premium. Those are the pennies.
You can't lose any money unless the Dow actually below $40.00 because those options will expire worthless. However, if the Dow goes to $39.00 ... then you'll be on the hook for $25,000. That's the steamroller.
[0] section III of https://www.sec.gov/investor/pubs/regsho.htm
National Best Bid and Offer (NBBO)
There are also specialist market maker roles for specific products, which don't have to use these systems, but those are professionals in niche markets too illiquid for the big shops.
Anyone buying options in the hope of getting rich is a speculator, not an investor. While they might lose money, they aren't being fleeced.
> And if adjustable-rate subprime mortgages were the oppressive product of the Great Recession, options trading might’ve filled their shoes for the current downturn.
This makes no sense to me whatsoever.
> wide bid-ask spreads that incur immediate losses for options traders.
A wide bid-ask spread might give you bad fills but that doesn't mean you incur an immediate losses. You might even turn a profit!
> To be clear: losing in the market is one thing, but managing to be systematically fleeced at a time when all boats were rising
Again, claims of people being fleeced proffered without any evidence. Buying options has a different payoff compared to buying stock. News at 11.
> Within that machine, encouraging or allowing leveraged options trading on short contracts among retail investors should be considered nothing less than criminal.
I'm not seeing what is supposed to be criminal here.
There's no attempt to explain how options actually work or why people lose money trading them. All we have is handwaving and conspiracy mongering. But I guess that's totally on brand for Jacobin.
It's also an open question whether non sophisticated traders / investors should be allowed access to more complicated investments. For me leveraging falls on the wrong side of the line. We saw what happened in 1929.
> one longitudinal study of nearly seventy thousand Dutch retail investors. The findings back up the story of the current wasteland of retail traders over the last two years. Over six years, researchers found that retail investors who participated in options trading lost, on average, 4.5 percent monthly, more than halving their accounts within a year.
Right, I quoted multiple sections from the article without reading it.
Options trading is zero sum. Add in costs and for a retail trader (not investor) it becomes negative sum. It's not surprising that retail traders consistently lose money. I'm still not seeing the systematic fleecing.
That said, some kind of options trading can be less risky than just holding stock because you can do things like collecting premiums until your target price is met. There are low risk strategies like the wheel that basically guarantee you income for doing nothing but being patient.
Listen to yourself.
You can essentially guarantee yourself an income. The risk comes from anytime you're holding stock and the stock value decreases, but you can sell calls on that and earn an income on that until a company goes out of business. This type of wheel strategy is inherently less risky than merely buying stock. There's obviously a lot of nuance to even simple options trading and I don't want to write out 100 paragraphs for some casual comment.
There Ain't No Free Lunch in options. Covered calls give up potential upside gains for income now. You still have the same downside risk as the underlying stock.
Taken as a whole, it's not the same exact downside risk because the premium you collect can make up for whatever downside that exists anytime you're holding a stock.
I'm not here to tell you what to do with your money, but all I'd say is that using a wheel strategy is inarguably less risky than buying stock outright.
You're hoping to see a specific number? What number are you even asking for? To me, your comment doesn't make even a tiny bit of sense because we're not talking about a specific quantity of a stock at a specific price for a specific time period, we're just talking about the general principles of basic option strategies.
It feels like you're going off vibes, which is fine, but what's irking people is that "basically" and "essentially" are weasel words that make it seem like you're trying to launder gambling as investing.
Maybe a better question to start with is, which measures of quantitative risk are you familiar with and how to they play into your strategy?
...or the buyer of the contract exercises the option. And yes, there's a lot of nuances, there exercise of options being just one of the nuances. That's why "you can essentially guarantee yourself an income" simply isn't true. Starting with the obvious fact that if it were true, everyone would do it.
Until the stock price tanks (for writing covered calls)
I haven't found any. And every time an option trader tells me about their "low risk" strategy I see a disaster waiting to happen. The "low risk strategies" of option trading are usually strategies where you make a bet that will give you a low income if things go about the way they have been going about for the past couple of years, and massive disastrous losses if a very unlikely seeming market event happens.
The problem is that the market loves serving up unlikely and impossible seeming events. So really what you think is a low risk income strategy is actually you providing insurance to someone against an unlikely but an entirely possible event without you pricing in the risk of the event in your insurance fees. Because you have managed to convince yourself the event will not happen.
For example, a couple of years ago people were so used to low interest rates that they kind of started believing that interest rates would be low forever. And they came up with all kinds of options and derivative strategies which seemed to generate free money but in reality were bets that interest rates would stay low, or would not breach a certain impossibly high seeming level. Well interest rates went up and in some places (for example, the UK) they hit levels many people thought impossible. And boy were there blow - ups.
More specifically, to your point, "the wheel" strategy is basically a bet against volatility. It will work if the volatility of the primary market is lower than the implied volatility priced by the options market. If not, it will not work and you will lose money. Oh, and if there is one high volatility event, bad enough to wipe you out ... well then you are wiped out. Even if the average volatility was in your favor. So, no, the wheel is not a safe strategy.
If you think you can predict volatility go ahead. But some of the highest paid traders try to do that and get it wrong, so, good luck. But do not fool yourself that you are being safe.
That said, using something like a wheel strategy on stock XYZ is inherently less risky than merely buying the stock outright because the premiums can at least be collected until your target price is hit.
If you buy the stock outright: you can lose everything if the company goes out of business.
If you use a simple wheel, you can still lose everything, but the blow is blunted by any premiums you collect.
I'm not understanding your comment. Who is forcing you to sell below market value and buy above market value?
Since 90% of people straight up suck at high-school level math, I think it's fair to assume that 90% of retail traders don't have the tools to understand derivative trading.
And as someone who vaguely understands the required maths, I already realized there was more productive uses of my time.
I remember in 2017 being told by a Wall Street analyst, "It's been ages since anyone's traded in an environment with actually-rising interest rates, be careful." The rise in rates came later than we both though, but I've thought about their comment often over the last year or so.
The knowledge is there, but the appetite isn't always.
Maybe this is an opportunity for some HNers to start considering perspectives that don’t treat the WSJ and The Economist as sacred texts.
Options are just a tool that lets you dial in the amount of risk you want, they can be set up to be more conservative or more risky than the underlying. The latter is what makes the news.
But there is no increase in downside in the financial sense (if the stock price declines you keep the premium).
Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2
The stock then goes to $200.
You have lost $90 of gains to make $2.
That's a huge loss.
Selling covered calls decreases your downside slightly but earning the option premium but it completely destroys your upside by taking away any of the upside beyond the call's strike.
that's much riskier than just owning the stock outright as your downside is capped but yoru upside is unlimited.
Using Abbot Labs as an example, a $2 option for 10% over current price would expire roughly 4 months out. So you could make $6/year, and only risk losing the gains over 10% that occur within each 4 months.
The types of stock I'll do with this are generally those I view as reliable, possibly with a dividend (yes, increasingly rare these days), with little exposure to catastrophic downside. This chunk of my portfolio is about minimizing the catastrophic as dollars 1-100,000 have a lot more utility in retirement than dollars 1,000,000 -> 1,100,000.
if you didn't write the call you could sell at any time, but you did write the call so you set the time at which you sell.
if the stock goes up alot then you end up losing alot of the upside.
If one sells a covered call but is not ready to sell the stock at that price, that's one's problem, not "covered call is a bad strategy" problem.
The only investing strategy that allows me to sleep comfortably is to buy & hold shares in companies that I wouldn't mind working for. I've also got some small % of the portfolio dedicated to long plays on companies trying crazy ideas that I personally believe in.
At no point do I invest based upon time-series data. I simply pick my desired targets and gradually accumulate shares indefinitely. Every time I tried to get more clever than this, my rate of return suffered accordingly.
Who here can prove it wrong? :/
The truth is sometimes people are able to make money on something. Sometimes their returns are going to be eye watering.
But you should know going in that finance is a game for sharks. If your skill is in mathematics, did you go to the best one of the best universities for it? If not, think long and hard about what type of angle you have that others haven't found. There may be a downside that you're unaware of.
But yes, the market can be be beat if you've got insight.
1) be willing to read a bunch of boring shit and make sense out of it. If you can read an sec filing and understand it and are willing to do so youre automatically in the top like 1% of retail. Most people are trading on social media tips and other bullshit like that. If you can figure out how to find and understand real no-bullshit information you're well on your way
2) having a small bank roll. Say under a few million. You now are able to take significant (significant as in, a significant portion of your net worth) positions in ultra small cap companies. Many Institutional traders cannot do this without legal implications they'd rather avoid and so you are competing with a much smaller pool of people, and those people are necessarily less advantaged (in terms of information and access to tools/resources) compared to you.
The only thing I would add, is the 3rd thing those people always say. It's easy to make money, it's just as easy to lose it. Make sure you're limiting your down side. Preserving wealth over long periods is critical.
Pro tip: don't play Russian roulette with anything involving a "clip" (more accurately: magazine) and even a single bullet[0]. "Revolver" is what you're looking for here.
OTOH, perhaps it is a fitting metaphor for amateurs trading options.
[0] Spoiler: a magazine-fed firearm with even a single bullet in it will feed that bullet right to your brain when you pull the trigger.
Might I suggest to the author posting some evidence/data that shows retail options traders getting burned? Burned in the sense of having no returns to speak of. Obviously, they're getting burned on bad spreads/lots of commissions (mentioned in the article).
I could be wrong but wouldn't simple logic dictate that... most people stop doing something that loses them money?
If they are losing 100% of the time (aka putting money in, it disappears, they are left with nothing over and over), wouldn't they stop?
Or are they winning just enough to keep them hooked?
I don't disagree. Wall Street = manipulative. Little guy loses. We get it.
But... what's drawing people to Robinhood? The thought of turning $500 into ~$1k+ really fast by guessing something correctly, right?
It's weaponized gambling. My question is, why is it so popular if they supposedly always lose/have nothing to show for it?
Humans aren't meat-based Turing machines, they're living beings with emotions and impulses. Why do you think gambling addictions are a thing? Or drug addictions? Or any bad habit that we know is bad, but still do it because self-control is difficult?
Isn't that all the more reason they should stop after they experience the emotions of their first loss?
If all they experienced were negative emotions + losses, they'd stop sooner/retail options trading wouldn't be "such an epidemic".
Therefore, something I feel the article author slightly missed discussing, they win sometimes.
That's the data I'm interested in.
How often does a retail investor, irregardless of predatory Wall Street + high commissions + fees + whatever, come out ahead on an options trade? Once a week? Once a month? Once a year?
If they win 50% of the time and lose 50% of the time, maybe it's not that evil?
Odds of guessing SPY direction right through calls/puts right and getting 30% return: going to guess not that bad
I'm curious what the odds of making a profitable options play are. It's got to be less than 50-50 because of the time decay.
You can bet the underlying goes up, that it doesn't go up, that it moves in either direction, that it doesn't move in either direction.
There are plenty of 90% odds option plays. Keep in mind there's a big difference between odds and expected value.
They do. There is no doubt there are a lot more "bagholders" than winners. People most likely upvote the winners hoping "I wish that was me" and keep chasing those mythical wins that seem to happen to everybody else except themselves (mostly). Therefore creating even more losses for themselves, etc.
Vicious cycle of hopium/FOMO.
Have you ever been to a casino? Everyone knows that the house always wins in the aggregate, but everyone hopes that they're one of the lucky individuals who will beat the odds and win as an individual.
I would guess, in the case of options trading, that it's not the same people being burned over and over again, approaching 100% of the time, but rather enough wins among the losses to keep some people hooked, while they eventually either get slowly drained or, in some cases, body-slammed. Couple that with a steady influx of new, intrigued customers, and there's enough fuel to burn for a while.
And "making easy money" by trading stocks / options / other securities is a far, far better story to tell than "I got lucky at the casino" - which helps lure even more players into the securities casino.
(And, at least in my social group, folks who win or lose at the casino seem to honestly speak of their net gain/loss. Vs. I've yet to hear a single story about making money in securities trading which even hinted at whether the teller's trades added up to a net gain or net loss for the (say) year.)
Some people view it as a form of entertainment, and most people view entertainment as something that is ok to pay money for. Keep it within your budget, and have fun. The exact same could be said for options trading.
I totally agree, btw, that you aren't likely to get rich options trading. But it certain can be a very fun way to test your skills at analysis and predictions.
what makes options trading fun? the allure of turning a profit
what does evidence show? not only will you not turn a profit options trading, you’ll realize losses
how is realizing losses fun when the goal was supposed to be to turn profit?
Absolutely, that is a major element of it.
> how is realizing losses fun when the goal was supposed to be to turn profit?
Well, if that is your goal, then I agree that it isn't going to be much fun.
Perhaps you are mistaken in assuming that everyone going to the casino or trading options has "turning a profit" as the primary goal. I don't think that is the case. It certainly never was with me. But I could be unusual ;)
The lottery is another good example. How many people bought tickets in the recent $2 billion lottery, knowing full well their odds of winning were close to zero?
Edit also this: https://link.springer.com/article/10.1007/s10899-016-9659-x
For example, if you visit Trading212 and try to use CFDs, you'll see the following warning:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high riskof losing your money.
And yet, Trading212 make huge amounts of money off-of CFDs, despite it being legally required for them to tell people that they will lose their money.
How many retail investors think they can be that 17% though?
It creates entire communities. You start following people who claim to have success/an edge but you can't see any actual statistics on their track record unless you put the time in to follow them. Think paid private Discord servers where you are paying for a tip on a winning trade.
Now it feels like there's no point to options because things are more stable and the big guys have better intel. I might as well play the lottery - clear odds, no insiders, and less manipulation.
No its not so one sided. If you really can lose 100% of the time you can just reverse the positions and make money. Price movements are usually random so you'll make money some times and lose at others.
Why can't the average retail investor come to that conclusion/realization on their own/draw enough conclusions to stay out of the market/not hurt themselves?
> one longitudinal study of nearly seventy thousand Dutch retail investors. The findings back up the story of the current wasteland of retail traders over the last two years. Over six years, researchers found that retail investors who participated in options trading lost, on average, 4.5 percent monthly, more than halving their accounts within a year.
If you use them correctly, they can reduce your risk & increase your upside. I've been learning & using them for a few years as kind of a side hobby. My small options portfolio has outperformed my index fund retirement portfolios that I don't touch in good times & bad.
I wouldn't recommend them though for anyone who needs to read the above article or anyone who doesn't invest a lot of time learning about options & keeping up to date with the companies they're investing in, the overall market & upcoming events that will adjust the mark.
Though I do agree with the article that the goal of options is usually not to get rich but to decrease your downside & possibly add a small amount of income.
>Researchers Svetlana Bryzgalova, Anna Pavlova, and Taisiya Sikorskaya found that retail options investors lost over $1 billion during a bull market from November 2019 to June 2021. Their calculations don’t include their estimated $4.13 billion spent on the trading costs, i.e. wide bid-ask spreads that incur immediate losses for options traders. And lastly, we can’t forget the $800 million burned in that time period on commissions.
Wide bid-ask spreads are a trading cost? That incurs an immediate loss? That's independent of the loss quoted in the return? If you (for some reason) do your options trading by only accepting standing bids/asks (market orders), then yes, you get a bad price ... but that would be rolled into the return figures, not an independent loss.
No matter what the bid/ask spread, you can place an order in the middle and wait for a fill.
And commissions aren't a "trading cost" but something that goes in a different (non-trading-cost) bucket?
Nope. You have a million ways to be wrong, and a very tiny narrow window of ways to be right. You can lose your shirt on poorly executed calls, even if the stock skyrockets. You legitimately have better odds walking into a casino and betting on black than buying calls/puts.
Expected value though...
Options trading is work. When I have open positions, I have to read a lot of news and get up before the market opens every day and watch things throughout the day with my finger on the sell button. It's not something you can really do while having a normal day job.
this is the catch. you are perpetually in a mental struggle because all it takes is one big bad bet to undo enough of your work that it wasnt worth it. So the options portfolio that you are up 300% on is probably less than 10% of your entire portfolio. Whether it is or isnt under 10% is not actually important, the point is that the stress involved should begin snowballing past that point
not to mention you probably have a decent amount of money liquidated at any given time. for most people it is way for efficient to put the entire portfolio into an index, preferably a tax beneficial account like 401k or roth IRA, and then use all that extra time and energy bettering their workable skillsets so that they can increase their raw income and reduce the odds of unemployment.
That said, when i was unemployed for a year - I did a lot of options/crypto trading because i just had so much time on my hands. Since I've been back at a full time job, it's just too draining for not enough benefit. I can work a few hours of OT and guarantee more money that week than trading would get me, and the OT is way less of a struggle
However, fun fact, certain retirement accounts let you sell puts and calls.
If the investemnt bank issuing the index fund goes bankrupt, you lose your money - see Lehman Brothers.
You can mitigate the risk by buying from different issuers. However, the bankruptcy risks might still be too closely related; in other words: there is the risk of a domino effect of bankruptcies of investment banks in a future financial crisis.
The best thing you can do to avoid this risk is to buy many different stocks and directly mimic an index or other fund yourself. It is not necessary to do this exactly. A random proportional selection of a considerable number of stocks (40+, but the more the better) from the index or fund you want to mimic and adjusting your investment once a year should be sufficient.
The actual assets are held by a separate custodian.
> Authorized Participant Concentration Risk...To the extent that Authorized Participants exit the business or are unable to proceed with creation or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem, Fund shares may be more likely to trade at a premium or discount to Net asset value and possibly face trading halts or delisting.
Most are no better and no worse off.
Some people get completely wiped out.
There is nothing wrong with buying low-cost index funds and holding them long-term. That's how you build wealth.
Given how prevalent this advice is these days, the indexes are arguably over-priced.
You want something to protect you in the future? Vote.
Many options trades are done in combination with other products, however, which allows for non-zero sum.
I'm a boglehead, but as I see it there are only 2 valid reasons to consider option trading:
- Hedging: e.g. if a big part of your comp is in illiquid private stock in a company whose outcome is highly correlated to IndustryX, you may want to hedge that with options. Not positive sum in absolute terms but you're paying to reduce risk. - Tax arbitrage: e.g. On a block of stock you got from an IPO. Positive sum from your perspective.
Both are a lot of work to do right and neither one is a silver bullet.
My guess is that we're about to see a bubble pop over the coming recession that no one realized was there.
but we have data that S&P500 P/E has been elevated compared to history for quite a while
(BTW you may ask why I don't trade uvxy options if I'm so confident in its profitability - well I can't conduct the above mentioned strategy without violating regulations because of my occupation. But I did prior to my employment and consistently made double digit % returns in 1 trade every 2 months or so.)
Why with a starting balance of $10,000 that would be (at the very lowest end of that range) over $1.25 billion dollars after 20 years.
If you don’t mind me asking, what was the offer that tempted you to give that up?
And the offer was for a job in the industry that would afford me the opportunity to learn a lot more about investing in general, especially about volatility based securities, while I was on the clock. It roughly doubled my salary too, so it was hard to pass up.
And this is exactly the problem. Most people don't know what they are doing, and it isn't easy to learn.
Even if you have a positive expected value bet, if you aren't using Kelly bet sizing, the odds are you end up bankrupt.
I notice your post only mentioned a positive outcome bet, but does not even hint at risk management tools.
Also you don't get rich by paying for liquidity (which is not to say you will always get rich providing liquidity)
Find some far OOM options and bet that they go up a lot because of increased volatility or directional move.
Jacobin claim: "As of this August, ordinary investors, [...], have lost everything they came to the market with during the pandemic." [source: Business Insider article]
Business insider article: "Retail traders have now lost all the money they gained during the pandemic, according to Morgan Stanley"
So no, Jacobin, they didn't loose everything they came to the market with, but they have lost all the profit in a limited span of time.
Anything else is gambling.
[0] measured over the long term.
https://en.wikipedia.org/wiki/Hillary_Clinton_cattle_futures...
"Her initial $1,000 investment had generated nearly $100,000 (equivalent to $373,360.84 in 2021),when she stopped trading after ten months."
I know...futures not options.
It's crazy to me that we restrict actual casino gambling to such a high extent but sports betting and options trading are just a free-for-all.
Assets also include ownership in companies, whether its your own or someone else. The best assets to own are the ones that have the potential to rapidly increase in value, but of course those are the most risky. So the balance is rate of asset value increase over time measured against risk of holding that asset. The best assets are also ones where a third-party can provide a value of that asset, and that asset has a market. The best assets are also the ones you really own versus borrow or lease or have to earn into. Of course, there are ways to borrow assets as a means to actually own and hold other assets.
I know this is stupid and basic, but people get so caught up in swings and moves and trades and plays and options and derivatives and this angle and that angle. But what has worked for me is to buy assets that increase in value, and keep doing that. You can't get "rich" by being an employee and trading your time for money. There's no asset increasing in value. Of course, if you own a piece of the company you're employed in, then what you're working for is to increase the value of that asset, and your income is a cash flow benefit. Likewise, you can't get "rich" by finding passive income. That's great for covering your cash flow and expenses, but there's no asset increasing in value. If you can find an asset that provides cash flow while also increasing in value, that's even better. You can't get "rich" by timing the market. First of all, that's mostly luck, so all examples of where that works can be attributed to luck more than skill, and second of all, there's no asset that's increasing in value.
Oh and one more thing. This is what I realized fairly recently. Venture capital doesn't invest in businesses. It's the biggest head fake there is. They invest in assets, high risk, fast growth assets. Whether that asset generates revenue for the business owners doesn't matter and often gets in the way of the asset increasing in value or slowing down the rate at which the asset increases in value. Whether that asset hires or fires employees doesn't matter (to the VCs). What matters is how fast can their asset increase in value and what is the market to sell that asset. Sometimes you have to increase the value of an asset by overhiring, and then by overfiring. Once you realize that VCs invest in high risk high return assets and not in businesses, then it all clicks.
That's a bit too facile. Yes, VCs invest in assets, but the assets they invest in are businesses and not, say, commodities or derivatives or options, which are also high-risk and (potentially) fast-growth assets.
VC's invest in businesses, but not just any businesses. They want businesses that can go from inception to IPO very quickly. Businesses like that are not typical (that's where most people get it wrong) but they are still businesses.
Yes, they do.
> Yes, the asset happens to be an operating corporation.
Not just any operating corporation. A business. Not all corporations are businesses. Not all businesses are corporations. VC's invest in corporations (almost invariably Delaware C corps) which are also businesses.
VCs make equity investments in businesses, and not other asset classes. Saying that they "do not invest in businesses [because] they're not interested in portions of revenue or profit sharing" is like saying that someone who buys Amazon stock is not investing in a business because Amazon doesn't pay dividends.
It is true that buying Amazon stock is different than, say, buying the local laundromat or opening a lemonade stand. But those are all still businesses.
And it is true that VCs don't invest in any old business. If you try to get a VC to finance your purchase of the local laundromat or to start a lemonade stand on the corner they will probably laugh in your face. But if you try to get them to invest in corn futures they will laugh in your face even harder. (And if you tell a VC, "You don't invest in businesses" they will probably write you off as a pretentious idiot.)
VC's invest in businesses. They specifically invest in businesses with high growth potential, which generally means startups. And it's true that what they care about is the growth and not the business details. But they still nonetheless invest in businesses.
Saying "VC's don't invest in businesses" is like saying that Ferrari collectors don't buy cars. There is a grain of truth there: Ferrari collectors don't buy just any old car, they buy Ferraris. But Ferraris are still cars.
And to the point on Ferrari collectors. They know that their asset is not a car, it's a Ferrari. They could potentially drive it around, but they don't. So to that example, they're actually not investing in cars, they're investing in Ferraris. You could make the same argument and say, well Ferraris are cars. And I'd say yes of course, but that's not the point. Ferraris could be boats or paintings, and it would be just as relevant. It's the asset value not the functionality they're investing in. That's why I say VCs invest in corporations not businesses, in the same way that Ferrari collectors invest in Ferraris, not cars.
There is no distinction between a corporation and "the actual business" of the corporation from the point of view of an equity investor. An equity investor buys shares of the corporation, and that's it. An investor might be motivated to make that investment because they want a return, or they might be motivated to make that investment because they are passionate about what the corporation does, but either way, they buy the same stock. There are not separate investment mechanisms contingent on an investor's motives.
It is true that VCs are motivated entirely by ROI, and this is an important thing to understand, but rendering that as "VC's don't invest in businesses" is wrong. It turns an important insight into a deepity [1].
(I suspect that this particular aphorism models itself after Ray Croc's famous quip that he was not in the hamburger business but the real estate business. But in his case it was actually true. Ray Croc never sold a hamburger. He sold franchises to people who sold hamburgers. That really is an important structural difference, and it's the reason that Ray got much (much!) richer than any of his franchisees. But in this case, the aphorism is flat-out wrong. There is no structural difference between what a VC does and what any other equity investor does, with the single exception that VCs never invest in companies that have already gone public.)