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>>Regarding "Don't beat the market", Warren Buffet says "The game is really easy when your opponent decides not to play".

Except Warren Buffet himself is a huge proponent of low-cost index funds, and recommends them for the average person.

You really can't use him as an example because he's at the extreme end of the spectrum: wealthy to the point where managing his wealth is his full-time job. He has decades of experience and the knowledge that brings. So to him, it does look as if no one else is playing the game. That's the real context of his quote.

Or you could, uh, buy Berkshire Hathaway...

At 214k a single stock, that doesnt seem very attainable.

there is a "b" class of berkshire hathaway shares that track almost identically with the "a" class that cost $214k:

https://www.google.com/finance?cid=9614464

the b shares are currently selling for $143/share

The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards.

If there is some method to turn $1 into $2 then there is a whole sea of people who are better and smarter than me who will keep doing it till that method no longer works.

Professionals also have a much more diverse set of goals, obligations, and restrictions. For example a professional running an SP500 index fund is not going to buy a great deal just because they can see it. Their goal is to track the SP500 and that is how they will decide which deals to do.

Even for non-index managed funds there are often objectives or restrictions like cap size, geographical location, industry, time horizon, etc.

So while they might have better tools, they're not necessarily competing with you directly.

> The reality is that the professionals have better tools. It's not just gambling, it's gambling against someone that can see the cards.

They may have better tools, but small investors have the advantage of being nimble.

If you're trading say, 10K per trade on large-cap stocks, you can have your entire trade executed within 10 seconds without moving the stock price (thanks to HFT, but that's another story). This makes trading on swings much easier for the small investor.

And there are plenty of tools available for the small investor, most brokers will give you access to them when you sign up for an account. Sure, you may not get streaming L2 quotes on a basic account, but you'll get all the company information you need and access to basic real-time quotes. If you want to get a little more sophisticated, you can use something like R to automate some of the information-gathering process, run models against historic data, or simply use it for very fancy charts (with every technical indicator known to mankind).

And, as has been mentioned, hedge funds, mutual funds, etc..., have different motives for trading. Sometimes they are hedging, sometimes diversifying, often they're very long term, etc... They're not always trading. Even HFT is mostly arbitrage. There's still plenty of room for small to medium traders to make money.

I'm an engineer. I don't have the time to become a brilliant investor too.

For people who don't quite know what they are doing, it is gambling.

1. Not everyone has the time to study finance.

2. According to Piketty, the market is doing pretty well over time, so simply following it is perfectly ok.

That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies. Obviously, that requires some serious study and resistance to hype.

> That said, I've heard the best way to beat the market is to invest in undervalued, small, unglamorous and mostly unknown companies.

There's an almost opposite approach that has been beating the market at least in recent years, "dogs of the dow": the idea is to buy the large companies that no longer have much growth potential (I remember McDonalds and AT&T as examples). People like to own small companies that they can imagine making it big, so the market undervalues large, old, "boring" companies that generate steady returns.

The underlying idea is the same for both approaches though: find a human bias that makes people over- or undervalue certain companies, and do the opposite. If there's any way to beat the market, that'll be it - and even that will fall as more trading is done by impartial algorithms that're immune to hype.

I don't think it's impossible for anyone to make money in the stock market, I just think it's impossible for me. OK, not impossible but it still strikes me as rather foolish to try. And I'm not even uninitiated, I used to work at one of the companies mentioned in this article.

> "%90 of options expire worthless, the real money is in selling them!" -- Abraham Lincoln

It's risk-reward thing, akin to 90% of disaster insurance policyholders won't make claims, but when the hurricane happens, you're gonna be screwed because the premium of the insurance is not calculated by an actuary but by the market where if you're an overzealous option seller, will have underpriced such that you may not have enough capital to cover the cost.

If you want to read more about option selling, I highly recommend Malcom Gladwell's New Yorker piece http://gladwell.com/blowing-up/ or you can also learn the way I did, by trading and being humbled by the market.

P.S. Options came into fashion in the 60's, so I don't think Lincoln ever got into financial engineering with financing the Civil War...

Maybe if you mean the 1860's :-)

I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing.

Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.

Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.

It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market.

Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"?

One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute.

Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor.

Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.

http://www.theglobeandmail.com/globe-investor/funds-and-etfs...

Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market.

Its really the worst of all possible worlds...

you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock.

All you're doing is collecting pennies infront of the steam roller that is the market.

The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down.

The reason people do it is that the market can be calm for months and then move.

So you get:

small income in month 1

small income in month 2

then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well.

Or put in laymans terms, the down side far outweighs the upside.

Also be careful here:

> Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.

Please note this is just wrong.

There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move.

My whole point is that selling covered calls does tilt the odds, just not in your favour:(

Limiting profitability to increase probability of success is one of the principles of professional trading. Take for example, every single spread that's bought and sold.

The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound.

I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%.

So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market.

* At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position.

By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%.

Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost...

And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free.

I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls.

Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit.

You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance.

Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.

> There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move.

No, you're just betting that it doesn't go past your short strike, which could be few percent above the current price.

The strategy is simple: Most long options expire worthless. Selling something that will soon be worthless is not a bad business.

I would imagine you would agree with my statement that buying OTM calls and puts is bad investment advice and likely to lose money?

Yes?

Ok, then why are you so against taking the OTHER side of that trade?

>> Buying stock is a 50/50 bet. The price can either go up or down.

Just because there are two possibilities does not mean they are equally distributed.

Go argue with Random Walk and Efficient Market theory. It's not a notion I just made up.

I'm not saying those theories are wrong. My suspicion however is that you took that statement out of context and grossly misinterpreted it, and are using that misinterpretation as the basis for the terrible advice you're giving.

If you can articulate exactly why it's "terrible advice" i'll eat my hat.

Here's my advice: If you invest the time to learn how to use derivatives, you can be far more profitable than investing only in stocks (whether companies or index funds). And I've made a lot of money, not by making gambles but by trading a large number of small positions over a long timeline, selling option premium and earnings a fantastic return.

It's a fact that retail investors have under performed as a class. And I didn't invent any of the strategies i'm using, nor did TastyTrade (though they do a great job advocating for and researching them). And I absolutely am delighted to spread the word, even if it means debating people like yourself. Your motivation is, I suppose, an innate certainty in your own correctness. It doesn't seem to matter to you that we're debating a subject that I clearly have a lot more passion about and experience with. And your message to anybody reading is "I can't tell you exactly why this is all bad advice, I'm just sure that it is."

I'm certain that options or futures trading isn't for everybody. But you're certain that it's not right for anybody and you and others here have taken a "shout him down" approach that is very un-HN imho...

Neither disputes that stocks go up over time (ie, movements are not equally distributed). They are more concerned with the difficulty of timing and beating the market.

I've had this idea before. Any advice on what strike price you'd sell the calls at?

Check out TastyTrade.com, watch some of the videos.

I have a few rules: 1. Only trade very liquid underlyings. Only 30-40 stocks make the list, and only 10-15 are companies. 2. I don't always sell covered calls, only when IV Rank is high enough to tip the edge in my favor 3. When IV is high, you can set your strike price further out. 4. It's good to go to the 1 Standard Deviation strike, so in your trading platform look for the strike that's around 68% OTM.

Truthfully, though, I don't do covered calls all that much. Because they tie up a lot of buying power because you have to buy the underlying stock. They work best if you already are committed to holding long term, and if you write them in you IRA, which will prevent any tax implications should your short strike be reached and your stock called away.

When that happens, by the way, I just deploy the capital elsewhere, it's not tragic.

I'd love to hear some more ideas. I was going to email you but I didn't see an email listed? Would you drop me an email?

When you say "basis" are you talking about tax basis? Are you suggesting there is some positive tax implication to trading options? Or are you talking about something else?

Retail investors on average underperform the market, yes. Retail investors who only invest in index funds tie with the market (pretty much by definition) and those who think they can beat it drag the average down. You're generalizing over a group that has no homogeneity.

> You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000.

Its like you're not reading any of the advice here. Its just as stupid to invest in an individual stock as to buy a call spread. If you're doing either, the bet you're making is "I know more about this subject than tens of thousands of professionals who have studied it for 100 hours per week for the last decade". Out of context, that's an obviously stupid bet except in very very rare circumstances†. So what about it being the stock market suddenly turns it around?

Index funds, on the other hand, definitionally track the market. Something which the professionals you think you can beat can't even do on average. This is the strategy that is being pushed, not buying a huge number of shares of a single risky company.

†Those circumstances are, in stock trading, largely illegal to act on.

Ok, forget TSLA: Why is it less risky to buy 100 shares of SPY (at around the same $20k as TSLA) vs a $300 call spread on SPY? How can it POSSIBLY be riskier to spend $300 vs $20,000?

I'm sorry man, you don't get it, but you're sure that you do, and you're so sure that you can't be wrong that you dismiss things you clearly don't really understand. You disagree that retail investors should use options? Make an argument aside from "it doesn't work" because I have years of returns -- and you can watch HUNDREDS of hours of studies on TastyTrade and others -- that makes a far better case than your abject dismissal.

I write about option strategies because I'm certain that it's good for individual investors to see serious, experienced people talk about it. I know, I know, you're certain I can't possibly be right (for some reason) and I guess you think I'm just making it all up out of some 4chan like desire to ruin people. Whatever, man. The only traffic to this page now is you and me and other existing commenters.

What's crazy is, TastyTrade, it's a startup! They took VC money and have a dozen data scientists producing meaningful research -- the same stuff hedge funds and prop firms do -- and they release it all publicly. They have a market theory, and they've built fantastic free trading software (first Think Or Swim, now Dough.com) to give investors tools to implement their strategies. These are the good guys, empowering people to not get screwed by some shitty store front financial advisor. They had a 1/2 billion dollar exit with ThinkOrSwim and they give everything TastyTrade does away for free. There's an app you can subscribe to if you want to, but there's no obligation, it's real altruism.

Now, feel free to have the last word. If you're up to it, I'd love your take on the question I asked somebody else:

Wouldn't you agree that it would be a bad idea for a retail investor to invest in OTM options hoping the stock price will move in their direction? It's an awful strategy, with a low probability of success. Almost certainly those options you bought will expire worthless. So why on earth are you advocating so strongly against taking the OTHER SIDE of that trade? Here's a good answer: If you just do not have any time to invest, if you can't put in 15 mins each morning, then fine. But you must feel pretty strongly, so please, explain why you wouldn't want somebody to make that trade.

My answer to that question is pretty much the same as my answer to anything else about investing in the stock market - don't pretend you know more than the professionals; just use index funds. My problem wasn't with TSLA.

> Why is it less risky to buy 100 shares of SPY (at around the same $20k as TSLA) vs a $300 call spread on SPY? How can it POSSIBLY be riskier to spend $300 vs $20,000?

You're fighting a strawman here. I'm not saying which of those is riskier; I'm saying they're both stupid things to be doing.

My question to you is: why do you think you can beat professionals despite spending 1/100 of the time learning about it? And why do you think this is advantage is scalable? You're playing a zero-sum game coming from a huge disadvantage.

Think about it this way: in a zero-sum game, you winning means someone else is losing. Who are you beating, and why are you doing better than them?

My answer is that the market is largely unpredictable and those who win have just been lucky so far.

I gave you the last word and I'll stand by that, but I think you misunderstood me and I'd like to clarify this point:

The SPY is an index fund. Of the S&P500. So no, you're not saying "they're both stupid". You're saying "buy an index fund" and I'm saying, there are more sophisticated ways of doing exactly what you're advocating.

And I'll answer your questions: 1. I don't have to "beat" professionals. When you sell options, you're selling at the Bid price. The market makers are still making their few-pennies cut, because that's how their business works.

2. Option pricing is transparent. One of the multiplicands in options pricing formulas is Implied Volatility. This is a forward looking, crowdsourced guess of where the market thinks volatility is headed. It's not backward looking, that's Historical Volatility. The thing about IV is that empirically, it over-estimates. Since the CBOE first invented the Call option 20 or 30 years ago, actual volatility has been lower than the Implied Volatility predicted. And that's the edge dufer, it's an arbitrage opportunity between IV and actual volatility. There is of course no guarantee it will always be there, but it always has been, and that counts for something.

Another way to look at this is simple: People buy options for a variety of reasons. Speculation and Hedging primarily. The options market has to build-in an edge for option sellers, otherwise nobody would sell them.

Alright, I'm sorry if ever my emotions ran a little high. I love HN but the tendency to shout-down what you don't agree with sickens me a little and I have a hard time just yielding to it.

The whole point of the article is that retail investors investing in index funds almost always beat the professionals.

Options have several characteristics that make them substantially riskier. Even selling covered calls is much trickier and riskier than investing in an index fund and likely to have poorer results.

They're not mutually exclusive. For best results, you should invest in an index fund and sell covered calls on it every month. Also, there's no "risk" created from a covered call. That's the 'covered' part. There is the possibility that you could "miss out" on an up move, but the trade off is the certainty that you will collect premium every month.

This is something that can be tested, and has been studied, and I encourage you to do that instead of relying on your bias here. Clearly you have some knowledge of the subject so sharpening on the finer points could be informative for you.

Except there are S&P 500 Buy write indexes/ETFs, and they underperform over long periods of time.

Right, because having somebody else manage your money isn't as profitable as managing it yourself. You would agree with that I'm sure?