Options: The Misunderstood Derivative

I reached out to a long-time reader who downloaded a copy of one of my e-books.

During the conversation he related an anecdote that must be happening many times and in many places.  I find it to be very disturbing.


Incidentally I was at a job interview (at a good-sized company) a few days ago and I was
asked about having options trading listed on my CV (as a pastime/other interest).
The guy basically accused me of having a gambling problem on the spot.

I tried
to explain that I am definitely not a gambler, and that options can be used to
reduce risk, but by the look on his face he was having none of it.

I am now redoing my CV and becoming a closet trader.


Isn't that amazing?  My correspondent uses a risk-reducing investment tool and some  moron gets to call him a gambler.   Not only that, but he probably has the authority to deny him the job.

Facing reality, the resume is being changed.  As he points out, it should be beneficial to be proficient in a skill that uses statistics and probabilities plus the ability to handle numbers. This job was in a scientific field where such skills ought to be appreciated.

Just one more example where we find people railing out against the beneficial stock option with no knowledge of the subject.  Sure, we all loathe the bankers and quants who gambled with derivatives that were too complex to understand, but the anger is misplaced in this case.

Any chance he'll still get the job?

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6 Responses to Options: The Misunderstood Derivative

  1. Donald W. 05/21/2010 at 6:55 AM #

    Hopefully, The person did not recommend your site as an educational source to the guy. For sure he would get rejected. It is so unlike you to call someone a moron, even if true. Never-the-less, still think you are a great wealth and source of information.

  2. Great anecdote – I just had to repost the link.
    I see this as a proxy for uncertainty and the way we [mis-]view it. We all deal with uncertainty in every aspect of our lives, not just from a financial perspective. Having a good understanding of uncertainty, and how to make good decisions in the face of it, is a proven evolutionary benefit. And yet, at least in the Mid-West, anytime the concept of uncertainty, risk, probability, or any other term for unforeseen outcomes is used, the typical emotional reaction is a negative one. Activities that accept and embrace the reality of risk and uncertainty, and take appropriate steps to minimize their negative impact and/or maximize their positive impact, are viewed on as distasteful behaviors.
    The very fact that “gambler” is used with negative connotations, even by you on this blog, is disappointing. “Gambling” is too all-encompassing a term to be endowed with rightness or wrongness. Is it gambling if I flip a coin with you for even money? Is it gambling if I sell an iron condor with a 90% probability of maximum profit? What if I make 15% of my margin when I do that? What if I make 8%? What if I make 15% but I use my entire investment account balance every month?
    Life is a gamble. There are good gambles (15% return on a 90%-likely-profit trade, using a small fraction of available funds), and bad gambles (same trade, using all my funds), and 0-return gambles suitable only for fun with friends (flipping coins for even money).
    I forgive you for using the term “gambling” to refer to negative-expected-value trades or trades that run too high a risk of ruin. You are, after all, targeting this blog to rookies; and option rookies probably suffer from the same misunderstanding of risk as the rest of society. I wish there were a better term, but I understand that there probably is not; and that’s not your fault.
    But it makes me sad that we as a culture have taken an evolutionary strength and turned it into something dirty and distasteful. It makes us all poorer gamblers, because we don’t even know we’re gambling.
    – Mark M.

  3. Mark Wolfinger 05/21/2010 at 8:52 AM #

    Donald,
    I hope I did not offend you. I’ve been polite in this blog, wherever possible.
    It is very ‘like’ me to do just that. I have a lot of patience when necessary, but I do not easily tolerate fools.
    Being anti-options is fine – but only when you have personal experience and have evidence that your poor results were 100% not your own fault.

  4. Mark Wolfinger 05/21/2010 at 9:00 AM #

    Mark,
    Thanks for the response.
    When we invest, we think we have an edge. We think we can do better than statistics suggest.
    In we have no edge going in, then we believe we have an edge due to our ability to manage money and risk. That truly is an edge.
    When gambling, we have no edge – unless you find a casino that doesn’t know you are counting cards when playing blackjack.
    I do not consider it to be gambling when the top bride, poker etc players sit down at the card table. They have an edge and their skills win out over time.
    I loosely use the term as taking a chance with no edge. Perhaps it’s my duty to mention that definition when I use the term gambling. I’ll try to do that.
    Regards

  5. It’s really just a matter of semantics and terminology.
    To you, gambling means embracing uncertainty with no edge and investing means embracing uncertainty with an edge. To me, playing a game or otherwise entering a transaction with uncertainty built-in, edge or not, is gambling. I’m unsure of your meaning from your wording, but you seem to imply that finding a casino that doesn’t know you’re counting cards is still gambling, but with an edge. That completely agrees with my terminology, but I suspect that it contradicts yours.
    I would still call what the top poker or bridge players do gambling, albeit “with an edge”. When they do it against each other, their edge is very small and very liquid; from day to day or even hand to hand, any one of them has a slight edge on the other. When they do it against [presumably] you or me, their edge is far bigger and more reliable.
    I think philosophically you and I are on the same page, and that’s part of the reason I enjoy reading your blog – you do an excellent job of crystallizing things into words that make me step back and consider my assumptions.
    On the other topic, calling someone a “moron” is totally “you”, I agree. Suffering fools only discourages them from changing. Keep calling a moron a moron.
    – Mark M

  6. Mark Wolfinger 05/21/2010 at 12:40 PM #

    Thanks Mark.
    We are in agreement. If I can count cards, it may still be gambling due to uncertainly. However, if I am allowed to play long enough, the chances of success are very high. Because they are not 100%, it’s always going to be a gamble.
    Trading with no edge is a bad idea. Paying commissions and slippage tilts the odds of success to far less than 50%. There must be an opportunity to use skills to rebalance those odds.
    Regards