Get Rich Trading Options? | News or Noise

Options trading is easy! As the bull market marched on, and since no commission trading entered the scene, the day trading and options trading businesses have exploded in size. Internet, TV, and newsletters advertise that they’ll teach you the tricks and give you the tools to potentially become independently wealthy as a trader. This advice business has boomed to the tune of hundreds of millions of dollars annually.

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” for your investment portfolio. This week’s topic is the stories and newsletters targeting retail investors telling you that you can “get rich day trading or trading options.”

Falling commissions in stocks and options have been a marketing and customer acquisition strategy for years. In 1975, Charles Schwab built their franchise on fixed fee per trade commissions, while other brokerage firms were still charging fees based on shares traded or, worse yet, on the total dollar size of the trade. Technology innovation has enabled cheaper trading for stocks and options now that they are digital, not physical products. Many brokers passed on savings to grow their market share over the next four decades.

Bored with single stocks during the Covid lockdowns, many retail investors moved into trading options due to their financial leverage. Unfortunately, for retail investors, options are far more complex than many people understand. I have an electrical engineering degree, an MBA, a CFA, and I love math, and I still get confused when discussions of the “greeks” in options come up. Was that Delta or Gamma I should be worrying about? The mathematical complexity of options, coupled with the information disadvantage that most retail investors have, should scare almost every amateur away from doing anything in options trading ex, maybe selling covered calls on an existing long position to generate some income.

What do I mean by information disadvantage? No, I’m not talking about inside information on how good or bad the underlining company is doing. I’m talking about the information generated from the billions of dollars in Payments for order flow that wholesale firms like Citadel securities and others are paying Schwab, E*TRADE, and Robinhood to direct trades their way on your behalf.

While this does reduce your trading commission and spread, it may not be getting you the best end price. Moreover, in paying for these trades, these wholesale firms and their staff of hundreds of mathematicians, physicists, traders, and technologists now have information on whether both the options market and their underlying stocks are balanced or not.

They have a better picture of an option, and its underlying stocks supply and demand and risk reward. In other words, in the world of options trading, they are the wolves in the market, and you are their sheep, waiting to be slaughtered. With this more complete information book, they operate more like the “house” in a casino, and you, the retail option trader, are the gambler sitting at their table with the odds stacked against you over time.

Here’s an interesting chart on small retail option trading from Sentiment trader. Look at this chart for a minute and let it sink in. It’s a chart on how much extra money retail options traders are paying for calls over how much extra they are paying for puts. As one can see it’s been a great contrary indicator around major stock market moves with retail options traders paying big premiums to speculate to the upside in mid-4th quarter of 2021 right near the market top, and now they are doing the opposite, paying large premiums to bet on more downside moves in the markets after the S&P500 has already declined into bear market territory.

The next time, you see a TV ad or newsletter service advertising “get rich trading options” with our system, I urge you to change the channel, or unsubscribe to the newsletter, as the odds of success trading options for a career at the retail level is extremely low with the failure rate in the mid to high 90% range. Options trading made easy? In three words? “Don’t do it”.

At Oak harvest, we think our clients are best served by us helping them plan for their future needs, instead of focusing on the past. The future is always uncertain and that’s why our advisors and retirement planning teams, plan for your retirement needs first, and your greed’s second.
Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
I’m Chris Perras and from everyone here at Oak Harvest Have a blessed week.

News or Noise: Noise