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How to Lose Money

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Re: How to Lose Money

#151

Post by JumpCrisscross »

rutthenut wrote: post #130
mumblemumble wrote: post #127

A secondhand anecdote: An acquaintance of mine used to be a professional options trader. A fairly successful one, too. He retired from the job in his early 30s. After that, he tried doing a little options trading on his own behalf, for old times' sake. The look on his face as he recounted how that went down was a sight to see. I don't know exactly how much money he lost, or how quickly, but my take-away was, roughly,…

I would think it can also be a bit easier playing with 'other peoples money' as you can hold for longer, double-down and so on, whereas with your own money, the risk is even more real and the pot usually much more limited. However, a trader that doesn't do well and makes losses won't last long in the job either. Luck could make or break either type of trader too.

> it can also be a bit easier playing with 'other peoples money' as you can hold for longer

As a former options market maker (granted, not buy side master of the universe), I saw practically every one of my former colleagues do the above. (I chose the messy path of going all in on a start-up.)

Practically everyone lost money or furiously broke even. Options live in a multidimensional space that is tough to recalculate real time without the tools. You can get everything right and then a stock borrow rate shift or rate futures curve bend wipes out your capital. They are designed for hedging. They are total shits outside that context to the point that I’m surprised they’re available to the general public.

Re: How to Lose Money

#152

Post by bob33212 »

ramraj07 wrote: post #141
smiley1437 wrote: post #136

Options are effectively Zero Sum - meaning that whoever is on the other side of the contract is predicting the opposite of whatever you're thinking. Successful long-term options traders don't trade options 'directionally' (like buying 50K of GME calls), they manage a whole portfolio of options, and then take directional portfolio risk. This is sort of like diversifying, then running risk analysis, then figuring out w…

But the truth is all the awesome analyses with those programs still cannot actually predict the STOCK PRICE right? If I truly believe I have a better guess about whether a stock is going to go up than the general market conensus (which is what I'm assuming is powering options pricing), then I do stand a chance of making money right? None of what you say seems to change anything about how a regular investor looks at a…

It depends on the situation. For example, if you believe that the FDA approval for Moderna vaccine will be revoked next month, using an option could be a good way to make money on what would obviously be very bad for the stock next month.

On the other hand if you just generally like company you could buy that stock directly and not worry about finding a 3rd party to take the other side of the bet. That 3rd party is trying to make a profit and even though you may be right and that 3rd party may be wrong you are still introducing a 3rd party into the investment.

Re: How to Lose Money

#153

Post by ronyfadel »

Xevi wrote: post #146
ronyfadel wrote: post #19

Earlier quoted context omitted.

Yes and no. A Comp Sci./Eng. degree is pretty much guaranteed to get you a decently paying job. My ROI has been > 20x. Learning a 3-5 yr curriculum on your own is a surefire way to get you demotivated and/or depressed.

> Yes and no. A Comp Sci./Eng. degree is pretty much guaranteed to get you a decently paying job. This is not true in a lot of countries according to my experience. I would not suggest this path for anyone that might start college in a couple of years. Unless you manage to get into a big company you'll probably find it easier to get a job and a good salary in many other sectors. I know pre-school teachers that had a…

Which country has pre-school teachers making more than software engineers? (I'm curious!)

Re: How to Lose Money

#154

Post by caffeine »

He forgot the best way to lose money on options - selling options! It's a great and effective way to lose money - sell out of the money options and get paid a premium, and feel smart! Until the unexpected happens and you go bankrupt. So you get to feel smart AND lose money!

Re: How to Lose Money

#155

Post by itsoktocry »

aphextron wrote: post #5

>The nice thing about options is that there isn’t just one way to lose money. No, you can lose money in many different ways – far more than I can write on this page. This is the most important lesson of options. It's never just a coin flip. You have an unimaginably huge number of factors riding against your success. It's not even remotely close to a 50/50 win/lose scenario. There are a million ways to lose, and just…

>There are a million ways to lose, and just a few narrow ways to win.

I'm not sure I understand. You can take either side of the trade you want, so if you think you've determined how lopsided it is, why aren't you doing the opposite trade?

Re: How to Lose Money

#156

Post by gowld »

mattmaroon wrote: post #118
metafunctor wrote: post #96

Earlier quoted context omitted.

How does holding money have an "unlimited loss potential"? You just buy back at whatever value the stock is at the time. I would argue that money is a neutral position (adjusting for inflation which is nowadays quite low). After all, we buy stuff with money, not stock. Now, selling short, that has an unlimited loss potential, but it's very very different from a cash position.

It’s unlimited because in the time he is holding cash there’s no limit to the amount the stock market could increase. If he sells a stock for $10, and then it goes from $10 to $10,000 he’ll only be able to buy back 1/1,000th of what he had. He lost $9,990. It’s the same as writing call options. There’s defined upside and unlimited downside.

By that theory everything has unlimited loss potential.

"Loss potential" (downside risk) in finance refers to money you lose, not money you could have made by doing something else.

https://www.investopedia.com/terms/d/downsiderisk.asp

Re: How to Lose Money

#157

Post by scythe »

JumpCrisscross wrote: post #143
ramraj07 wrote: post #141

Earlier quoted context omitted.

But the truth is all the awesome analyses with those programs still cannot actually predict the STOCK PRICE right? If I truly believe I have a better guess about whether a stock is going to go up than the general market conensus (which is what I'm assuming is powering options pricing), then I do stand a chance of making money right? None of what you say seems to change anything about how a regular investor looks at a…

> If I truly believe I have a better guess about whether a stock is going to go up than the general market conensus (which is what I'm assuming is powering options pricing), then I do stand a chance of making money right? Yes [1]. But a one-way single-leg options bet is far less likely to make you money, in that case, than just going long or short the stock. [1] I am going to parse “truly believe” as have an informat…

> far less likely to make you money, in that case, than just going long or short the stock.

Yes, but puts are a lot safer than shorts, because the downside is finite.

Re: How to Lose Money

#158

Post by ffhhj »

j_barbossa wrote: post #30

This seems to be a very one-sided view. I personally know a guy who makes ~3000 USD month with a book about worldly wisdom. I know about it because he pitches his book on every occasion. And I guess that's true for everything: Just writing a book is not enough, pitching and selling it actively afterwards is key.

Saying that he earns a lot of money with his book means that it's a succesful book, which is part of pitching it correctly. But you won't know whether that's true unless he gives you access to check his actual sales.

Re: How to Lose Money

#159

Post by itsoktocry »

yreg wrote: post #80
throw0101a wrote: post #76

Earlier quoted context omitted.

> E.g. If I am net long in my portfolio and I fear some headwinds I can buy a put or two for the peace of mind. Now those puts should be always considered as worthless, and it is just the price to pay for the peace of mind. Why don't you just change your allocation? If you can't sleep at night because of your current portfolio, and gyrations that are occurring, or that you are worried could occur, I would say it's ob…

Year ago when we were reading the news about what is happening in Wuhan, some of my friends bought SPY puts as an insurance against the potential crisis. The best outcome for them would be if those puts expired worthless. When you insure your house, you don't usually wish for it to burn down. I haven't acted and my portfolio took a -30% hit right after. Your suggestion (to change the portfolio allocation) would mean…

>When you insure your house, you don't usually wish for it to burn down.

You're leaving crucial information. You don't buy insurance (or puts) at any price. It has to make economic sense, and the person on the other side presumably has the same information.

Re: How to Lose Money

#160

Post by ROARosen »

smiley1437 wrote: post #136

Options are effectively Zero Sum - meaning that whoever is on the other side of the contract is predicting the opposite of whatever you're thinking. Successful long-term options traders don't trade options 'directionally' (like buying 50K of GME calls), they manage a whole portfolio of options, and then take directional portfolio risk. This is sort of like diversifying, then running risk analysis, then figuring out w…

That is not completely true, options a by-and-large used for hedging purposes to mitigate losses in the event something goes wrong with your principal. Of course, there will also be long plays in options, but that is not the majority.

This is evident from the fact that there is generally higher implied volatility for puts rather than calls, which implies more contracts on the put side than on the call side. That would not be the case in any other zero-sum investment - say, forex. Also generally the stock market is by nature a long market so the options market should have been long-heavy.

The reason for this is because the options market is saturated with huge portfolio holders are using it merely to hedge against their long investments.

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