[HN Gopher] How Retail Investors Lose Money in Option Trading
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How Retail Investors Lose Money in Option Trading
Author : Bostonian
Score : 7 points
Date : 2022-09-07 21:01 UTC (2 hours ago)
(HTM) web link (quantpedia.com)
(TXT) w3m dump (quantpedia.com)
| SOTGO wrote:
| From an outsider's perspective it seems almost intuitive that
| market makers (the pros) make money off of retail (the amateurs).
| It's hard to imagine how that could not be the case.
| codyb wrote:
| It's like getting into a boxing ring alone to face ten prime
| world champions after an hour at the gym is my analogy.
| JumpCrisscross wrote:
| > _it seems almost intuitive that market makers (the pros) make
| money off of retail (the amateurs). It 's hard to imagine how
| that could not be the case._
|
| Individual investors can beat professional investors, though
| it's hard to do. I have seen no evidence showing individual
| investors outperforming when using non-linear derivatives.
| Utilitarian buyers of options treat it as insurance. They
| _expect_ to lose money. There are fundamental reasons a market
| maker will be able to manufacture options at a cheaper price
| than an individual, ranging from cost of capital to the benefit
| of a book to order execution times and settlement dynamics.
| sudosysgen wrote:
| There is, however, plenty of evidence that professional
| investors outperform individuals, reliably. And professionals
| make most of their money from non-linear derivatives (or make
| their own).
|
| People say that hedge funds are worse than passive investing,
| and that's often true, but it's true because that's after
| fees - professional investors routinely beat the market by 3%
| YoY long term averages, it's just that they are basically
| paid as much as they make you.
| JumpCrisscross wrote:
| > _professionals make most of their money from non-linear
| derivatives (or make their own)_
|
| Source? (It's not true for common definitions of those
| words.)
|
| Most hedge funds won't touch options for the reasons I
| mentioned. They're a hedging tool. (They will happily use
| swaps and other leveraged instruments. But those are
| linear.)
| sudosysgen wrote:
| I can tell you with great certainty that at least some of
| the biggest institutions that are legally hedge funds do
| use options. And I consider highly leveraged derivatives
| to be non linear (because they are on the downside),
| which may be an abuse of common parlance.
|
| It's going to be fairly difficult to give a source,
| though.
| jshaqaw wrote:
| Source my friend? I worked in hedge funds for almost two
| decades. All of them touched options plenty. There is a
| big difference between using options to get a particular
| risk/reward exposure you want and clueless retail chasing
| some meme short squeeze nonsense which has the expected
| value of a drunk newbie sitting down at a Vegas poker
| table.
| JumpCrisscross wrote:
| > _big difference between using options to get a
| particular risk /reward exposure_
|
| Sorry, it was my turn to be imprecise. Most hedge funds
| aren't taking exposure through options but managing risk
| with them. Most _asset managers_ never touch options.
| Most professional money managers (institutional; I'm not
| counting FAs) are not at hedge funds.
| renewiltord wrote:
| The article claims that the mechanism for this is actually a
| very simple failure mode. That's interesting.
|
| It would be uninteresting if it said that the pros beat the
| amateurs. But it is interesting in that the pros are not trying
| to beat the amateurs. Instead, the pros have very simple
| strategies at play here, and the amateurs are blundering:
|
| 1. The amateurs seek to buy options before announcements they
| think will trigger big moves even though the spread is high
| (rationally, if the spread is high, you should be a little
| worried since it increases the risk you can't close what you
| open at a desired price)
|
| 2. The announcement happens
|
| 3. The amateurs hold their options despite their desired
| direction not occurring
|
| 4. This amplifies their losses
|
| So, overall, as a retail trader you could do these very simple
| things:
|
| * Be afraid of big spreads
|
| * If you traded expecting volatility and the big announcement
| happened and the outcome you wanted didn't, cut your losses and
| leave
| Bostonian wrote:
| The link should be to https://quantpedia.com/how-retail-losses-
| money-in-option-tra...
| Sohcahtoa82 wrote:
| I read the title and just thought of /r/WallStreetBets
|
| Those people lose money because they either have no idea how
| options work or are just really really bad at it. Or they see a
| stock jump 500%+ in a week and then buy high.
|
| Some of them simply treat options like a slot machine.
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