[The Trading Chapter] Episode 20: The Winner Sells “Hope”! The Cruel Truth of Options Trading and Professional Strategies ??
Last time (episode 19), we looked at the real faces of the battlefield we fight on: stocks and ETFs. We discussed the traps of stocks that you fall into because you fall in love with a company’s future and can’t cut losses, and the realities of ETFs being eroded by costs that seem safe but are actually invisible.
Now, we step into the world of “options trading,” the biggest climax of Chapter 8, where many traders dabble and funds melt away.
Let me start with the conclusion. In the options market, most beginners are turned into victims, and only the professionals quietly reap profits.Buying options casually is an act of putting yourself into a disadvantageous game.
Why does such a cruel thing happen? This time, we’ll clearly unravel the tricks and the professional’s way of fighting.
1. What options are: a business that trades “hope”
Imagine a lively trading floor. There are people passionately shouting, “This stock will surely go higher!” and others seized by fear, “No, it will crash.”
Beginners buy “hope”: They pay for options (the right to buy or sell) dreaming, “With little capital, I might make a lot of money.”
Pros sell “hope”: One professional options writer (seller) said, “Options are a business of hope. People buy hope. I’m a pro, and I sell hope to them.”
If the price does not move as expected by the expiration date, the value of the option becomes zero. In that case, the seller pockets the premium received from the buyer as profit. Collectively, buyers may win temporarily, but in the long run they certainly lose.
2. The invisible enemy called “time” that slowly kills the buyer
To understand how buying options is so disadvantageous, you must grasp the concept of time decay (time value erosion).
Value melting like ice:Options have an expiration date. As expiration approaches, the chance that the option will fulfill the hope decreases, so its value gradually declines each day.
A cruel foe for buyers:Even if the market moves not at all, simply holding the option makes the buyer lose money every day.
The strongest ally for sellers:Conversely, as time passes, sellers become more likely to profit. Sellers sell options to enjoy the benefits of this time decay.
3. The only moment when buying options is allowed as an exception
So, should you never buy options? Actually, there is one exceptional strategy.
“Cheap lottery” strategy targeting a crash:Only when you expect a prolonged, significant market collapse (a downtrend) do you buy “put options” that profit from a plunge.
Betting with discarded money:Look for puts that are far from the current price, have low probability of realization, and are very cheap. These are priced like a cheap lottery. If a major crash occurs, these seemingly worthless lottery tickets can generate enormous profits.
