Back in the day, trading options as a professional floor trader was a license to print money.
In 1983, I traded index futures and options on the New York Futures Exchange.
Retail investors had no idea which options were mispriced and didn’t stand a chance.
So, while they would see their money go up in smoke … professional traders like me would put on complicated strategies that made money like clockwork.
Nothing much has changed in the past 40 years.
Don’t get me wrong, options trading has a place in portfolio management if used as a hedge.
But the way most retail investors buy and sell them — trying to guess the direction and the duration of a market move — is a losing game.
From The Wall Street Journal:
Retail traders can be lured into options trading because of the leverage, but the winners are almost always the lightning fast computers that are trading against them…
Despite this, animal spirits are still in full bloom…
Risky and Complex
More people than ever are trading options.
On an average day, about 39 million options contracts change hands. That’s up 35% from last year’s average — and the highest level ever.
Sure, you can make a lot of money with options. But in my experience, you have a better shot at making money at a roulette table in Las Vegas.
Because options trading is notoriously risky due to how complex options are.
That’s why most brokerages require approval before you can start trading options. They have to do their due diligence to make sure investors are aware of the risks involved.
But with the rise of apps like Robinhood, that’s no longer the case. You can get approved almost instantly with these apps — even if you’re not well aware of the risks.
With this easy access to options trading, everyday traders are piling in. They have hardly any experience, but are being lured in by the potential of big gains.
And that’s one of the stupidest things you could do right now…
No Better Than Gambling
For most people, options are no better than gambling.
If you don’t have experience and are just trading based on the fear of missing out, you’re playing with fire. And some traders are learning that the hard way.
One even had to lose nearly $400,000 on a single options trade before quitting Robinhood for good. After making that huge mistake, they said:
There’s a lot of other folks like me who think they know the stock market and the right way to manage risk exposures and diversify, but a lot of them do not. They’re just overconfident idiots.
Now, I don’t want you to have to learn the hard way like this. I want you to be able to sleep easy at night and let time do the heavy lifting for you.
So, the Real Talk is that options have no place in an Alpha Investor’s portfolio. Because we’re not gamblers.
Of course, no investing approach is without risk. We won’t always win. But with my Alpha Investor approach, we win far more often than we lose. And the gains more than make up for the losses.
So, I want you to remember: When it comes to your money, you should always take it seriously.
You can always have plenty of fun later, spending your profits after you’ve made them from the thrill-seekers out there.
Founder, Alpha Investor