Options Are Not Gambling
Vol #7 - September 18th, 2020
The internet is great at telling you that you’re wrong.
I wrote a blog on Wednesday morning about how options are NOT gambling, and it really fired up the options community on Reddit. By saying that options aren’t gambling, I went against the very features of options that many embraced.
Later that day I saw another poll on Twitter, with over 1000 responses, split exactly 50/50 on whether trading was gambling.
Have I been thinking about this all wrong?
There has been a fantastic surge in retail activity over the last 9 months. Overall industry volumes are up 44% compared to this point last year. The majority of that increase has been from individual customers trading options for their own accounts.
Many of them are inspired by message boards, TikTok gurus, and get rich quick schemes. The market has displayed a frothiness that is particularly lucrative for options trading. When things move a lot, loose risk management has a way of minting certain lucky millionaires to further feed the hype.
What is undeniable, is that many people like options for exactly the attributes that make them look like a game of chance.
Personally, I don’t believe that trading options is fundamentally about gambling. It’s why we started Harvested Financial - to deliver responsible options strategies. While many users are approaching it as such, there is more you can do with options than just speculate with leverage.
Risk is an inevitable feature of our lives. Even the safest investments are prone to inflation or global calamities. Not taking risk is a risk. Options are risk management tools to customize portfolio outcomes.
There is a spectrum ranging from diversification, across active investing and towards speculation, that ends with games of chance. Uncertain outcomes are the universal feature here, and investors tolerate them differently. Can the same instrument fit each of these needs? Absolutely.
I’m still hesitant to use the word gambling. At Harvested Financial, matching investors to risk preferences isn’t a table game, it’s good portfolio management.
Thanks for joining us,
Mark Phillips
CEO
What clients are asking us:
How do I sign up for your webinar?
We can’t wait to host our first webinar in less than two weeks! We’ll be going over what “Strategy Execution as a Service” means, and how we implement options strategies for our clients. There will be a discussion of the major events in the options markets as well as product demonstrations and live Q&A. Who knows, there might even be some trivia and a give away.
Click here to register today.
What do you mean by retail?
Retail traders are non-professional traders. They’re the individual investors who are making buying and selling decisions for their own account. Institutional traders are the fund managers, market makers, and other organizations who manage money professionally.
Check out our Twitter @harvested_dafe for more up to date news.
Strategy Focus
Balanced Protection is one of our flagship products because it directly answers a question many investors have about their holdings - how can I protect my money if the market goes down?
Insurance is a familiar concept. We have health insurance, car insurance and home insurance. You pay a little bit every month and when something happens, the insurance company pays for the doctor’s bill, accident, or fire damage.
With those types of insurance, you have several options of deductible and coverage amounts to choose from. With stock market investments, you have hundreds and thousands of different ways to finely tune your insurance coverage.
Does every down day cause your stress to go up? Or are you focused on the long term and only checking your account quarterly?
Everything is a trade-off, so how much protection you’re asking for determines how much you’re going to pay. The market’s overall pricing of protection changes day to day; if investors are predicting a bumpy ride ahead, it’s like buying insurance in a flood zone.
One of the interesting questions around deciding protection levels has to do with frequency. Buying long term options to protect your portfolio is cheaper than buying lots of short term options. But what happens if the stock goes up?
With a single long term coverage plan, you pick the level of protection you want today. If your holdings are worth $50,000, you can protect them from dropping below $40,000 between now and the end of the year. But if by the end of the month they’ve increased in value to $60,000, now you have $20,000 to lose before protection kicks in.
This flexibility ultimately costs more on an annualized basis. However, if locking in gains is interesting to you, consider adjusting your coverage cycle to update more frequently.
Happy Friday
There is a fantastic series of interviews with traders that Jack Schwager has compiled into a series called “Market Wizards”. He interviews dozens of traders across all asset classes and styles to determine what makes them the best.
In his original volume he interviews Ed Seykota, who recounts the following parable: The Jademaster
One cold winter morning a young man walks five miles through the snow. He knocks on the Jademaster's door. The Jademaster answers with a broom in his hand.
"Yes?"
"I want to learn about Jade."
"Very well then, come in out of the cold."
They sit by the fire sipping hot green tea. The Jademaster presses a green stone deeply into the young man's hand and begins to talk about tree frogs. After a few minutes, the young man interrupts.
"Excuse me, I am here to learn about Jade, not tree frogs."
The Jademaster takes the stone and tells the young man to go home and return in a week. The following week the young man returns. The Jademaster presses another green stone into the young man's hand and continues the story. Again, the young man interrupts. Again, the Jademaster sends him home. Weeks pass. The young man interrupts less and less. The young man also learns to brew the hot green tea, clean up the kitchen and sweep the floors. Spring comes.
One day, the young man observes, "The stone I hold is not genuine Jade."
Learning about trading and the markets, we’re all like that young man who is anxious to understand the essence without putting in the work. We’re frustrated by the tasks that seem irrelevant, and grate at having to repeat back symbols and prices over and over.
To us, this story demonstrates the importance of passion and diligence in your work. Understanding isn’t achieved through simply reading a book, but immersing yourself in the nuances and peculiarities of a problem. It comes over time, as you’ve stamped out corner cases, and come to expect the unexpected.
Whether it’s software development, execution, or education; we’re putting in the time to make tea and sweep the floor. We don’t know much about jade, but we do know about options.