Debating on Options trading - any suggestions

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prettybogle
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Debating on Options trading - any suggestions

Post by prettybogle »

DH is debating on re-starting second innings in options trading. His first innings was fairly bad - lost money. I am persuading him to not do it but he is getting sold on this idea by his friends who are showing off their gains. I am interested to know what is bogleheaders experience with options trading. Thank you !
DoctorPhysics
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Re: Debating on Options trading - any suggestions

Post by DoctorPhysics »

People are quick to brag about their wins. You never hear about the people who lost.
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arcticpineapplecorp.
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Re: Debating on Options trading - any suggestions

Post by arcticpineapplecorp. »

Warren Buffett on why bubbles happen: People see neighbors 'dumber than they are' getting rich.

does that explain what's happening? Will this end well? Has your husband ever played musical chairs?
“Well there will be one sometime," he said in an interview for CNBC’s "Crisis on Wall Street: The Week That Shook the World" documentary. "People start being interested in something because it’s going up, not because they understand it or anything else."

The Oracle of Omaha says the human behavior and jealously that leads to crises will forever be a part of the financial system.

source: https://www.yahoo.com/news/warren-buffe ... 00990.html
would threat of divorce change his mind?
Is Options Trading Risky?

Now that we know what options trading is, let's take a look at the risk behind it. The issue, however, is that not all options carry the same risk. If you are the writer (seller) you have a different risk than if you are the holder (buyer).

Call holders: If you buy a call, you are buying the right to purchase the stock at a specific price. The upside potential is unlimited, and the downside potential is the premium that you spent. You want the price to go up a lot so that you can buy it at a lower price.

Put holders: If you buy a put, you are buying the right to sell a stock at a specific price. The upside potential is the difference between the share prices (suppose you buy the right to sell at $5 per share and it drops to $3 per share). The downside potential is the premium that you spent. You want the price to go down a lot so you can sell it at a higher price.

Call writers: If you sell a call, you are selling the right to purchase to someone else. The upside potential is the premium for the option; the downside potential is unlimited. You want the price to stay about the same (or even drop a little) so that whoever buys your call doesn’t exercise the option and force you to sell.

Put writers: If you sell a put, you are selling the right to sell to someone else. The upside potential is the premium for the option, the downside potential is the amount the stock is worth. You want the price to stay above the strike price so that the buyer doesn’t force you to sell at a higher price than the stock is worth.

To simplify further, if you buy an option, your downside potential is the premium that you spent on the option. If you sell a call there is unlimited downside potential; if you sell a put, the downside potential is limited to the value of the stock.1

source: https://www.investopedia.com/articles/i ... ptions.asp
If he didn't do well last time, what did he learn from that experience and why does he think it will go differently this time?
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venkman
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Re: Debating on Options trading - any suggestions

Post by venkman »

The BH case for options trading is that--if you do it right--you can capture the variance risk premium, which is somewhat uncorrelated to the equity risk premium, thereby reducing the overall volatility of your portfolio without reducing expected returns.

My guess is that increasing portfolio efficiency is not the reason your DH wants to get back into options trading.

This situation seems like it would fall under the unofficial BH "It's okay to actively trade as long as you keep it to 5% or less of your total portfolio" guideline. He can take that amount and play with it. If he beats the market, great. If not, oh well. Either way, no more ever gets taken out of the portfolio to add to the "play money" account.
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jjunk
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Re: Debating on Options trading - any suggestions

Post by jjunk »

I dabbled in options for the first time earlier this year, for no other reason than to educate myself on it and see if it might be an interesting hobby. Made money on my first 4-5 trades so then decided to up my overall cost/trade and lost 4K. No longer have options enabled on my account. This ends my TED Talk :D
Marseille07
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Re: Debating on Options trading - any suggestions

Post by Marseille07 »

I don't like options trading because options are a zero-sum game. If you made money, someone lost money on the same contract.

This is much different than holding TSM where there can be more winners than losers (if the market goes up).
gtrplayer
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Re: Debating on Options trading - any suggestions

Post by gtrplayer »

venkman wrote: Fri Dec 03, 2021 11:18 pm The BH case for options trading is that--if you do it right--you can capture the variance risk premium, which is somewhat uncorrelated to the equity risk premium, thereby reducing the overall volatility of your portfolio without reducing expected returns.

My guess is that increasing portfolio efficiency is not the reason your DH wants to get back into options trading.

This situation seems like it would fall under the unofficial BH "It's okay to actively trade as long as you keep it to 5% or less of your total portfolio" guideline. He can take that amount and play with it. If he beats the market, great. If not, oh well. Either way, no more ever gets taken out of the portfolio to add to the "play money" account.
I’ve always wondered about that rule… if you gamble with 5% and lose it - easy to do with options - the whole pot is smaller and you could say, eh, I’ll use 5% of that… and then lose it and repeat… it would continue infinitely… or when a person learns how to short stocks…
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tetractys
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Re: Debating on Options trading - any suggestions

Post by tetractys »

I had a friend who went professional working the option seminar circuit. It didn’t take her too long to realize it wasn’t a guaranteed win for the clients.
ivgrivchuck
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Re: Debating on Options trading - any suggestions

Post by ivgrivchuck »

Marseille07 wrote: Sat Dec 04, 2021 12:13 am I don't like options trading because options are a zero-sum game. If you made money, someone lost money on the same contract.
That's true, but if you go short on volatility (iron condor, strangle), you are effectively an insurance salesman, and you have positive expectation. This is the "variance risk premium", venkman mentioned above.

That being said, after you consider spreads and trading costs, it's probably going to be a lot of trouble for very little gain, and not worth the effort for most people...

Now obviously most people treat options trading as a "get rich quick" scheme, focus on risky trades, and sooner or later fail miserably...
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HyperCat
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Re: Debating on Options trading - any suggestions

Post by HyperCat »

I treat it like casino gambling. It's an occasional, fun pastime that is completely separate from any actual BH-inspired investing I do. Here and there I make a few small bets and see what happens. If I win, I feel good and might brag about it a little; if I lose, it's an insignificant amount of money in the big picture. Using it for anything more than that is a recipe for disappointment and financial derailment in my opinion.
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prettybogle
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Re: Debating on Options trading - any suggestions

Post by prettybogle »

Thanks for all replies. I echo the same negative view of options trading but he is being tempted by his friends outsized gains in options over regular stocks 😊
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arcticpineapplecorp.
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Re: Debating on Options trading - any suggestions

Post by arcticpineapplecorp. »

prettybogle wrote: Sat Dec 04, 2021 8:13 am Thanks for all replies. I echo the same negative view of options trading but he is being tempted by his friends outsized gains in options over regular stocks 😊
have his friends quit their jobs yet to trade options full time if it's so lucrative? If not, why?
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Shallowpockets
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Re: Debating on Options trading - any suggestions

Post by Shallowpockets »

Options is a broad term and slung around here frequently without any real examples or results. What does DH think he will make on his options and what exactly is he going to try?
What’s the plan?
Lots of people who do options here are enamored but the complexity, as if that alone means they are in the game in any significant fashion. How esoteric do iron condors and straddles sound to others you are espousing your tricks to? Oooh, options trader.
And what about this 5%? What is with an option at, say, 10 cents? That is the extent of trading on this 5% that BHs tend to take. Low cost, sure. But what is one contract! At that price is it worth anything, except playing a game.
Lost money, gained money, but really what is the extent of it. Tell us, those of you with options what exactly you do and are in for.
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Re: Debating on Options trading - any suggestions

Post by pkcrafter »

prettybogle wrote: Sat Dec 04, 2021 8:13 am Thanks for all replies. I echo the same negative view of options trading but he is being tempted by his friends outsized gains in options over regular stocks 😊
Sure, the market has been favorable to high-risk investing, but when this changes (and it will), friends will lose their shirts. The returns generated by using leverage are not worth the risk taken. Nisiprius has written numerous posts (with performance data) that shows the returns don't match the risk taken. Take a look here---

https://www.google.com/search?sitesearc ... n+leverage

Tell hubby that leveraging has no place in long-term investing.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
magicrat
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Re: Debating on Options trading - any suggestions

Post by magicrat »

Can your husband price an option? My guess is no
grok87
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Re: Debating on Options trading - any suggestions

Post by grok87 »

DoctorPhysics wrote: Fri Dec 03, 2021 10:05 pm People are quick to brag about their wins. You never hear about the people who lost.
this
RIP Mr. Bogle.
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Re: Debating on Options trading - any suggestions

Post by grok87 »

Marseille07 wrote: Sat Dec 04, 2021 12:13 am I don't like options trading because options are a zero-sum game. If you made money, someone lost money on the same contract.

This is much different than holding TSM where there can be more winners than losers (if the market goes up).
yep
RIP Mr. Bogle.
Marseille07
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Re: Debating on Options trading - any suggestions

Post by Marseille07 »

ivgrivchuck wrote: Sat Dec 04, 2021 2:59 am That's true, but if you go short on volatility (iron condor, strangle), you are effectively an insurance salesman, and you have positive expectation. This is the "variance risk premium", venkman mentioned above.

That being said, after you consider spreads and trading costs, it's probably going to be a lot of trouble for very little gain, and not worth the effort for most people...

Now obviously most people treat options trading as a "get rich quick" scheme, focus on risky trades, and sooner or later fail miserably...
It is positive expectation, kind of like we think US TSM goes up over time.

The problem with insurance salesman type trade is that your return profile would be extremely skewed. Basically you collect pennies in front of a steamroller, and you pay bigly when an unlikely event you're insuring against eventually occurs.
ivgrivchuck
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Re: Debating on Options trading - any suggestions

Post by ivgrivchuck »

Marseille07 wrote: Sat Dec 04, 2021 11:23 am
ivgrivchuck wrote: Sat Dec 04, 2021 2:59 am That's true, but if you go short on volatility (iron condor, strangle), you are effectively an insurance salesman, and you have positive expectation. This is the "variance risk premium", venkman mentioned above.

That being said, after you consider spreads and trading costs, it's probably going to be a lot of trouble for very little gain, and not worth the effort for most people...

Now obviously most people treat options trading as a "get rich quick" scheme, focus on risky trades, and sooner or later fail miserably...
It is positive expectation, kind of like we think US TSM goes up over time.

The problem with insurance salesman type trade is that your return profile would be extremely skewed. Basically you collect pennies in front of a steamroller, and you pay bigly when an unlikely event you're insuring against eventually occurs.
That is true.
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NostraHistoria
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Re: Debating on Options trading - any suggestions

Post by NostraHistoria »

If he is going to day trade them, remember that Peter Lynch says day trading is next to impossible.
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inbox788
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Re: Debating on Options trading - any suggestions

Post by inbox788 »

NostraHistoria wrote: Sat Dec 04, 2021 11:57 am If he is going to day trade them, remember that Peter Lynch says day trading is next to impossible.
Magellan Fund hasn't done very well these last couple of decades.
https://www.google.com/finance/quote/FM ... ARCA%3AVTI
arcticpineapplecorp. wrote: Fri Dec 03, 2021 10:05 pm Warren Buffett on why bubbles happen: People see neighbors 'dumber than they are' getting rich.
Remember what he said about derivatives being financial weapons of mass destruction.
Shallowpockets wrote: Sat Dec 04, 2021 8:31 amWhat is with an option at, say, 10 cents?
Well, 10 cent options are like lottery tickets. If buying, do you feel lucky? If selling, the expression is picking up pennies in front of a steamroller.
Tell us, those of you with options what exactly you do and are in for.
What do you mean by "are in for"? Are you asking how much skin in the game? Why does it matter, especially to OP? The rules to options are like the rules to poker that you can find anywhere. The options market can use more chumps.

https://www.christopherfountain.com/blo ... the-chump-
Tracker968
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Re: Debating on Options trading - any suggestions

Post by Tracker968 »

I tried it again in March of this year. Bought Jan 2022 calls on ARKK. Cathie Wood's innovation fund was all over the news. Seemed like a good bet. I waited until the next down day and put my $2500 fun money into it. Well ARKK has gone steadily down since then. Current value of my options is around $50. Cured me for a while. I guess its a capital loss opportunity.
000
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Re: Debating on Options trading - any suggestions

Post by 000 »

I would say don't do it and if he still wants to do it he should read this text in its entirety:

Characteristics and Risks of Standardized Options

Then if he still wants to do it he should pick up an options pricing textbook.
NostraHistoria
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Re: Debating on Options trading - any suggestions

Post by NostraHistoria »

inbox788 wrote: Sat Dec 04, 2021 4:08 pm
NostraHistoria wrote: Sat Dec 04, 2021 11:57 am If he is going to day trade them, remember that Peter Lynch says day trading is next to impossible.
Magellan Fund hasn't done very well these last couple of decades.
https://www.google.com/finance/quote/FM ... ARCA%3AVTI

Thanks for that link.
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nedsaid
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Re: Debating on Options trading - any suggestions

Post by nedsaid »

Options are mostly to mitigate risk within a portfolio, more like buying insurance than buying an investment. It is like insurance as there is an ongoing cost as options expire, to maintain a risk mitigation strategy you have to keep buying new options to keep that strategy in place. Above, there is a mention of the Variance Risk Premium, it is a real phenomenon and it is a real way to make money on options but it does come with risk. Stone Ridge had an interval fund based upon the Variance Risk Premium and it was closed earlier this year and merged with another fund. I am sure there are other strategies out there to make money with options but they come with risks that may or may not be fully understood by individuals attempting to execute those strategies. There is always more to this stuff than what you think.
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