Any method that requires you to trade frequently is not good to get you and keep you rich.
Also you don't get rich by paying for liquidity (which is not to say you will always get rich providing liquidity)
No, You Aren’t Going to Get Rich by Options Trading
191–200 of 223 posts
Re: No, You Aren’t Going to Get Rich by Options Trading
#192Earlier quoted context omitted.
I've heard this strategy referred to as "picking up pennies in front of a steamroller" - it works until the CEO is discovered to be a fraud, goes to jail, and stock loses 80% of its value in a week. Then you lose everything on a single position. Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn'…
If the expected value is positive that means in the long run it should be fine right?
If you have infinite capital, and the market is infinitely liquid, sure. c.f. martingale betting strategies.
Re: No, You Aren’t Going to Get Rich by Options Trading
#193Earlier quoted context omitted.
I mean... It really can just be luck. Even the absolute rock star traders have a nasty habit of regressing to the mean on a long enough time line. It just turns out that when you have a several million participants - some of them have "a long enough time line" of 30+ years.
"It really can just be luck" ...well, luck or insider trading.
For every option and share bought, there is someone who sold it on the other end. Doesn't require much insider trading, given that for every trade that went poorly on one side, it went well for the person on the other side of it. Whether it went poorly on the sell or buy side, it doesn't matter.
Given this, you can see why there are just actual purely statistical reasons for tons of trades going well with zero insider trading needed for that. Half of them are bound to do well. Whether you can consistently stay on the "good side" of your trades is a separate story, though.
P.S. Not trying to deny that insider trading exists, but its prevalency tends to be extremely overblown.
Re: No, You Aren’t Going to Get Rich by Options Trading
#194I understood that options trading is zero-sum: to win, someone else has to lose. In this sense it’s like gambling, also in that the house always wins because they collect the fees no matter what. Like gambling I’m sure there are plenty of people with success stories too. Is this assessment wrong?
With the fees, options are (slightly) negative sum.
I'm a boglehead, but as I see it there are only 2 valid reasons to consider option trading:
- Hedging: e.g. if a big part of your comp is in illiquid private stock in a company whose outcome is highly correlated to IndustryX, you may want to hedge that with options. Not positive sum in absolute terms but you're paying to reduce risk. - Tax arbitrage: e.g. On a block of stock you got from an IPO. Positive sum from your perspective.
Both are a lot of work to do right and neither one is a silver bullet.
Re: No, You Aren’t Going to Get Rich by Options Trading
#195Earlier quoted context omitted.
> If they are losing 100% of the time No its not so one sided. If you really can lose 100% of the time you can just reverse the positions and make money. Price movements are usually random so you'll make money some times and lose at others.
But the overall trend is what... lose money? Why can't the average retail investor come to that conclusion/realization on their own/draw enough conclusions to stay out of the market/not hurt themselves?
The trade payoffs are random. Its like a casino, they house takes a cut on each trade.
Re: No, You Aren’t Going to Get Rich by Options Trading
#196The way to get rich by options trading is to make a market in them, to aim to be as neutral as possible on your greeks and to take bid/ask spread, and to do this with extremely high-quality real-time risk analytics systems, first-line trading oversight and second-line risk management oversight. In other words, it's to be an equity volatility trading desk.
(I worked in equity options market making in the past) I'm not sure this is such a good idea. Professional companies that do equity options market making have major natural advantages over you: - They are at the front of the line of any order if they're on the NBBO, so they're going to capture the spread - They get order flow from offline brokers, which tends to be high volume and have higher edge - They do gobs of v…
Don't forget their massive investments in technology to be the first for those pennies (high-frequency shops, custom machines colocated at exchanges, etc).
There are also specialist market maker roles for specific products, which don't have to use these systems, but those are professionals in niche markets too illiquid for the big shops.
Re: No, You Aren’t Going to Get Rich by Options Trading
#197Earlier quoted context omitted.
It's a misunderstanding to think that retail traders are "up against" the trading desks of the big market makers: that implies that they're playing the same game, which is not the case. The goal of a market maker is to trade as much as possible, on either side of the book, with the widest possible spread that remains competitive, while keeping within risk limits. Most retail option strategies are based on beliefs abo…
Is there any data that suggests retail options traders should not even attempt to be clairvoyant because "if this, then that" logic to the underlying instruments price and its movement is too naive to be successful, or does a lot of the "technical analysis" (support/resistance, moving average crossover, volume/volume weighted average price, etc.) become a self-fulfilling prophecy? there are other members that make up…
>Is there any data that suggests retail options traders should not even attempt to be clairvoyant
The market makers and other participants are not playing the same game, but they are playing in the same market; and that is ultimately zero-sum. If the market makers are making money on your transaction costs, and they're profitable (which they are) then there's already some signal there, surely?
Re: No, You Aren’t Going to Get Rich by Options Trading
#198Earlier quoted context omitted.
> it's to be an equity volatility trading desk There are already a lot of real professional trading desks doing this. How can you compete with them?
Put in limit orders that are way out of line and pray for unsophisticated takers?
Exchanges are legally obligated to provide the best possible buy/sell quotes to people, so this is not gonna work.
For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50.
Now, imagine you queue in your way out limit sell order at $200, and then some unsophisticated trader submits their limit buy order at $201. Your limit sell won't trigger, until the entire queue of sell orders sorted by increasing prices (starting at $150.50) gets filled first. If that unsophisticated trader wanted just one share, they will get that one share at $150.50.
The whole idea of a limit buy order at $201 is that it will execute at the cheapest available price, as long as it is below $201. Similarly with limit sell orders, your $200 limit sell will execute only at the edge of bid-ask gap price, as long as the cheapest available ask is at $200 and meets the bid at that number. Until that moment, for every buyer, the queue will be processing all the cheaper ask prices first, until it chews through all of them (which would pump the stock enough to reach your limit sell price).
Re: No, You Aren’t Going to Get Rich by Options Trading
#199Honestly this is why after dipping my toes into this some time back (along with some very limited time spent in crypto without any kind of derivative shenanigans) I came full circle back to index funds and just putting what I can away at the end of the month. Are index funds going to make me crazy-bonkers-rich? No, but neither was anything else in all likelihood. What they’re brilliant at is giving me my time and att…
whats a good way to start with a Bogle strategy, as it were? I never heard of this before and I'd like to learn more. Is this sorta like a Buffett rule thing?
Basically it’s just invest consistently over a long period and for all purposes forget about the money (or at least consider it in your mind to be beyond use).
An index fund is as close as investing gets to a savings account. It’s not a savings account, and will go down if the market does - but the logic is that unless you think it’s the end of the world then it will recover. So you just play the long game and end up retired comfortably (and probably early, depending on when you start and how hard you go at it).
Put the 8% you can reasonably expect into a compound return calculator and it’ll give an idea of what to expect. It’s not clairvoyance though - things (good and bad) will happen along the way and the numbers will adjust accordingly from the guesstimate.
Re: No, You Aren’t Going to Get Rich by Options Trading
#200Earlier quoted context omitted.
> Have you ever been to a casino? Some people view it as a form of entertainment, and most people view entertainment as something that is ok to pay money for. Keep it within your budget, and have fun. The exact same could be said for options trading. I totally agree, btw, that you aren't likely to get rich options trading. But it certain can be a very fun way to test your skills at analysis and predictions.
but it’s counter-intuitive what makes options trading fun? the allure of turning a profit what does evidence show? not only will you not turn a profit options trading, you’ll realize losses how is realizing losses fun when the goal was supposed to be to turn profit?
> what makes options trading fun? the allure of turning a profit
Absolutely, that is a major element of it.
> how is realizing losses fun when the goal was supposed to be to turn profit?
Well, if that is your goal, then I agree that it isn't going to be much fun.
Perhaps you are mistaken in assuming that everyone going to the casino or trading options has "turning a profit" as the primary goal. I don't think that is the case. It certainly never was with me. But I could be unusual ;)