Hacker News Reader

Comment by logicalmonster | Hacker News Reader

You're probably not going to get instantly rich doing any kind of options trading. The story of an average guy who randomly makes a big bet, times the market perfectly, and quickly turns a few thousand dollars into a few million happens once in a while, but is incredibly rare.

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.

View on HN

"There are low risk strategies like the wheel that basically guarantee you income for doing nothing but being patient."

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.

Anytime you're holding stock, you obviously take a theoretical risk. How risky something is is a judgement call that each individual needs to make for themselves.

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.

Wrong, it is inherently more risky. You are fooling yourself.

Please explain how so.

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.

If you use a wheel, you will lose more on average. You will be guaranteed to sell below market value and to buy above market value. Yes, with the wheel you may end up with a little bit of premiums if your stock goes to zero, but in most cases you end up worse with the wheel than owning a stock. That is because, when you own a stock you buy it at market and when you decide to sell, you sell it at market. With the wheel you end up buying and selling at prices worse than market. And if volatility is high -- significantly worse.

> If you use a wheel, you will lose more on average. You will be guaranteed to sell below market value and to buy above market value.

I'm not understanding your comment. Who is forcing you to sell below market value and buy above market value?

The option contracts you wrote are forcing you.

Many option bets have uncapped losses.. If you buy a share of Coca Cola for $60, you could lose $60 if the company goes bankrupt. If you sell a naked call to earn the premium, you can in theory, lose an infinite amount of money.

> There are low risk strategies […] that basically guarantee you income for doing nothing

Listen to yourself.

You owe me a $10 keyboard. This one’s covered in coffee now.

What is your issue with my comment? What I said is true.

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.

That's like saying you can rent out a burning house. It is technically true, but folks usually like to preserve their initial capital while making income.

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.

> 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.

That is a good point, but is in no way evident from the initial reply[1] and its quotation of the objectionable part.

[1] https://news.ycombinator.com/item?id=33548323

Right, so in case it's not clear, people are asking you to quantify "basically" and "essentially" with math to get a number out. English words aren't going to make your point. They want you to back it up with a statistical analysis.

> people are asking you to quantify "basically" and "essentially" with math to get a number out

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.

That's the beauty of outlining a methodology. You'll need to answer a few things but most importantly, how do you quantify risk when executing your strategy ie:selling calls?

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?

...but you can sell calls on that and earn an income on that until a company goes out of business.

...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.

> collecting premiums until your target price is met

Until the stock price tanks (for writing covered calls)

Back in the day I used to sell a lot of covered calls on blue chips for this reason. Locking in almost guaranteed small returns that you could churn again and again.

Selling covered calls is a way to make money with the risk of capping your upside. QYLD is an ETF that does this for you.

https://finance.yahoo.com/quote/QYLD

The 5y doesn’t look so hot on that.

Make sure to factor in the yield which sits ~12%. It's tech based and rising rates make 12% less attractive so the ETF price has expectedly come down. Similar if someone was holding tech stocks and selling CCs against their positions.

Reply on news.ycombinator.com