You turn on the lights. Flip a switch.
There’s a binary where the light is either on, or when you leave the room it’s off. I haven’t yet reached the stage of Dad where I grumble around the house turning off unused bulbs, but I typically don’t put much thought into how my stage is illuminated.
Backyard football games used to end when someone got hit in the face because they couldn’t see the ball coming. Oops, I guess it is time for dinner. Not much has changed because the same thing happened to me last night at tennis.
My obliviousness goes the opposite direction too. Flip the wrong switch and the overhead lights turn the dining room into a hospital operating table. At least I can see my food.
Around here any important decisions about lighting are handled by my wife. Getting the right level of dim (I guess it isn’t a binary), or choosing the appropriate watts for soft white is far above my pay grade. But I can tell when it looks nice.
This won’t shock anyone who’s been on a video call with me. I think I have a pretty cool background - a crystal bull from five years of trading, my old badge on a wooden box of wine corks, even the requisite picture ringing the NYSE bell. But the lighting makes my sunburn look like Bozo the Clown.
Too much overhead, light leaking in the side window, it’s far from studio quality. When you’re sharing a screen and combing over rows in Excel, that doesn’t really matter. But if we’re going to be talking about wine, oh boy do I need a better rig.
Starting later this fall I’ll be co-hosting a weekly show - The Market WineDown - from my new cellar build. A chance to drink wine and rap about the market with my buddy Lex? This was something worth sprucing up for.
It took hours of adjustments. Try angling it more across the desk. Add another sheet over the light box to dampen that white. Fortunately I had advice because I’d never be able to muster the patience or attention to detail this required.
When I first got to show it off in a trading workshop, I jokingly pointed to my background and made the comment “this is why I trade options.” That’s literally true, but it casts the wrong glow.
There are only two good reasons to trade options. Either you have an edge, or you’re looking to transfer risk. Everything else is just gambling. No judgement, but also no crying in the casino. The odds are against you.
Many of the bottles in my cellar were purchased during my time as a market maker. When the job was literally to trade options and provide liquidity. You went to work every day to collect edge and find opportunity.
It was a job with a paycheck. The entire point of being gainfully employed is to pay the bills and fund your goals. And for a business to be successful and continuously provide for its employees, it needs to be disciplined and execute on a strategy.
Market makers are paid to trade options because they are willing to take the other side of a trade. By managing their risk profile in a savvy way, and accurately pricing derivatives, they get paid more. The fact that there’s a randomness to the outcomes clouds the fact that this is fundamentally a business of hedging inventory.
There’s an important nuance here. Making money in the business of options trading is different than making money trading options. While the IRS might consider them the same thing - PnL is PnL - the structure and approach is wildly different.
The edge that dealers have is the infrastructure (software, access permits, compliance) and human capital to manage a book of options positions. If you don’t have that edge, you shouldn’t be gamma scalping or quoting two sided markets from a python console. You’re setting up a lemonade stand in front of Walmart.
Plenty of people would buy a nice cold lemonade on their shopping trip you might say. Exactly. There are different edges out there.
You’re not competing with the big box on price or selection, you’ve got a boutique offering that fits a niche. That lemonade stand will have better margins, but not from trying to sell shotguns and Barbie dolls too.
Market makers aren’t solely responsible for keeping markets efficient. There’s plenty of informed orderflow that is going to trade options because they see something mispriced. They observe an effect that is both logical and repeatable, and exploit it with discipline. Then it probably goes away and we all keep adapting.
If you don’t have the patience or risk tolerance to exploit those edges, don’t worry that itchy buy finger can find another reason to trade options. Risk transformation is another great use case for the little financial scalpels. That’s the majority of my options trading today.
A little bit less portfolio volatility. A little bit more juice on that stock position. Both of these will cost you a tiny bit in implicit transaction costs, but have a meaningful impact on your results. That’s why we prefer to do them in places where markets are liquid, where the spread is tight and valuations consistently tack very close to “fair.”
Why you’re trading options isn’t because of the narrow PnL on that specific trade - it might very well be a big loser - but how it compliments the entire position.
It’s a very common misconception that people make money trading options. Many business models are predicated on promoting this exact idea. Because I’ve just provided examples where that is the most accurate way to describe how cash flows into various pockets.
This supports the illusion that there are options strategies that make money. Just YouTube “covered calls” or “iron condor” and prepare to ring the cash registers. But those are just expressions, structures - various ways to put on a position.
It’s not options trading that makes money. It’s having an edge or an objective. Unless you’re in the business of trading options, the only reason to dabble here is because they’re the best way to express your thesis.
Come to the options markets for fun times and Yolos, but know that it’s no different than blackjack. Don’t come expecting options to make money - especially not passive income - unless you can define your edge independently of your strategy.