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How to Lose Money

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Re: How to Lose Money

#71

Post by OJFord »

xondono wrote: post #51
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…

tbh, the problem with options is that you can loose a lot of money that you don't have . People start to play with strategies without fully grasping how they work, and especially how exposed you are if you sell naked options. It's very easy to fall into the trap of creating an option strategy that even if it has good odds, will require a massive amount of margin. If this happens to you on a regular retail account, yo…

That's a possibility only if you write ('sell', but as in to the buyer of a call or a put, not the same as (buying) a put) options though.

The buyer of an option has exactly that - an option. Buyer downside is limited to the premium, the price paid for the option.

Re: How to Lose Money

#72

Post by nemo44x »

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…

Correct - some options have a more than 50% chance of winning and some much less. They are priced accordingly. In theory, options are priced such that you’ll break even (minus contract fees) long term in terms of money in and taken out. Of course bankroll management is a concept I’m not sure the YOLO crowd is too cautious about.

Re: How to Lose Money

#73

Post by asicsp »

I wonder how many noticed that the article continues with 5 points for "How to make money" after the image with broken savings.

"4. Stop quitting" resonates the most with me, in hindsight. And I'm not sure if I would have persisted with my current work if I hadn't got lucky with encouraging sales at the start.

Re: How to Lose Money

#74

Post by nemo44x »

tim333 wrote: post #55
newcrobuzon wrote: post #38

Earlier quoted context omitted.

Options should be used as intended: as a hedge. 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. Similarly you sell options. Trading options on the other hand is just pure gambling. Even if you get the direction right you likely won't get the timi…

You can also write them in a low risk way for the benefit of others. If you hold some stock write options for people to buy it off you for twice what you paid, or if you are thinking of buying a stock write options for people to sell it to you at lower than the current price. But yeah trading can be iffy.

The problem with covered calls is you take on all the downside risk of the stock collapsing and get none of the upside gains if the stock rockets. Writing way OTM covered calls will not net many proceeds unless the stock is super volatile which means you likely have a lot of downside risk.

A good example from recently is Ford. Was trading at around $6 a few months ago and not too volatile. OTM calls were pretty cheap that were a few dollars up and essentially worthless at double the price. Anyone writing those was getting almost no premium. But then the stock took off quickly and hit over $12. Anyone who wrote those calls enjoyed none of those gains.

So even a stock like $F can move in very unpredictable ways.

Re: How to Lose Money

#75

Post by roland35 »

zuhayeer wrote: post #9

School is such a guaranteed one now during Covid – you don't even get social serendipity. You're literally sitting there on Zoom burning through cash. What common folk don't realize is that college is just a luxury consumption good of the rich.

This may be true for some degrees, but I feel like my engineering degrees were worth it and would still be worth it online. I feel like I could have gotten at least 75% of the value of my education online, especially with my Master's degree (both in Electrical Engineering). For me at least the value of my engineering degrees was in learning the fundamental approaches to solving problems, and most of my classes were lectures anyways without much interaction.

For engineering at least I think the other 25% of college should be building things, and unfortunately that is much harder online!

Re: How to Lose Money

#76

Post by throw0101a »

newcrobuzon wrote: post #38
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…

Options should be used as intended: as a hedge. 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. Similarly you sell options. Trading options on the other hand is just pure gambling. Even if you get the direction right you likely won't get the timi…

> 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 obvious that it's not suited towards your risk profile.

You're burning up some of the potential upside by spending money on the options, so why not simply take some money off the table instead and have a less complicated setup?

Re: How to Lose Money

#77

Post by Kathula »

Pyramus wrote: post #15
zuhayeer wrote: post #9

School is such a guaranteed one now during Covid – you don't even get social serendipity. You're literally sitting there on Zoom burning through cash. What common folk don't realize is that college is just a luxury consumption good of the rich.

Thats a very US American (anglosaxon?) viewpoint to take. Education is paid for by society in most Western parts of the world.

Sure, the education is paid(via taxes), but you still need to pay rent, food, bills etc. All people I know that studied took student loans.

Re: How to Lose Money

#78

Post by simonh »

Cthulhu_ wrote: post #24
Pyramus wrote: post #15

Earlier quoted context omitted.

Thats a very US American (anglosaxon?) viewpoint to take. Education is paid for by society in most Western parts of the world.

The US is composed of a heap of immigrants that migrated to the US and to a point intermingled culturally to come up with a new country / culture. The Anglo-Saxons were a people made out of immigrants from Germanic Europe that migrated to what is now England and mingled with indigenous British groups, tracing back to the 5th century. It's often used to refer to the language spoken in England and eastern Scotland unti…

There was a lot of Norse cultural influence in the North of England, but of course they had a lot of linguistic crossover with the Anglo-Saxons. In some recent historical TV shows the cultural differences between Anglo-Saxons and the Danes are exaggerated for narrative reasons, but they could actually understand each other's languages reasonably well.

The influence of Anglo-Saxon culture is the main reason why English culture isn't the same as French culture, so I don't think you can really say it's defunct. The influence of French is stronger in southern 'BBC' English, but England has a lot of regional dialects that still retain a lot of quite ancient linguistic influences.

Re: How to Lose Money

#79

Post by nemo44x »

dannyw wrote: post #59
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…

Earlier last year around May, when the stock market seemed to pick up after the COVID crash, I purchased a number of deep OTM LEAPs (long expiry options; until early this year). They were incredibly cheap. I often had trouble finding a market maker for those. I only chucked about $2000 in, but these options have grossed $15,000 in realised returns and $25,000 in unrealised returns. Options allowed me to make a “bet”…

Of course money is made. Likewise the same amount of money was lost by the people on the other end. You won this one.

However, long term you’d also lose some and in the end you’d probably be about even in terms of cash won and cash lost. Unless you’re an options guru which I don’t know exists. The market maker who gets the contract fee and hedges the contract is the only guaranteed winner long term.

Saying that I trade options when I sense opportunity and have had some outsized winners compared to my losers. However taxes need to be considered too, especially when you have a year with a net realized loss that’s greater than what the IRS let’s you deduct.

The way I’ve seen people get wiped out with options is not managing their bankroll. They’d have just too much of it spread across numerous options bets thinking they were diversified. And then the bottom falls out of nearly everything and the whole thing goes to 0. It happens.

Congrats on the win!

Re: How to Lose Money

#80

Post by yreg »

throw0101a wrote: post #76
newcrobuzon wrote: post #38

Earlier quoted context omitted.

Options should be used as intended: as a hedge. 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. Similarly you sell options. Trading options on the other hand is just pure gambling. Even if you get the direction right you likely won't get the timi…

> 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 temporarily selling stocks and holding money. That strategy has an unlimited loss potential[0] if the stocks rise before you buy them back. With puts you are limited to whatever you pay for them.

edit: [0] unlimited loss potential provided you want to keep the same stake at the companies

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