Why are Investors Afraid to Trade Options?

It's Labor Day and the US markets are closed.  Enjoy the holiday.

In this blog post (Hat Tip: Abnormal Returns), Joshua reports about how the individual investor is discovering the forex markets.Trading volume is booming.

Joshua points out how and why this is bad for the future.  It's bad for the investors, it's bad for the professional trader, and ultimately, it will be bad for the industry.  However, the brokers who are steering their forex-ignorant customers into these dangerous markets, will make out well for now.  Until those customers lose their money and abandon trading.

I know that option trading can be used to gamble.  But that's not the fault of 'options.'  When the gamblers find any opportunity – be it real estate, mortgage-backed securities, commodities, or even options, then those gamblers are going to stay true to form.

When the inevitable happens, and the gamblers who buck the odds lose, often the blame is placed on the gambler's tool and not the gambler.

Options have an undeserved bad reputation in some places.  People who had a bad experience because of their ignorance when placing trades, people who bought far OTM options and anticipated miracles, people who ignored risk and just kept increasing the size of their trades in a desperate act to recover lost money – walked away from the options world, blaming everyone but themselves.

Using language that blamed their brokers, or the market makers, they tell others that options are something to avoid.

Blogs such as Options for Rookies, along with many others, try to spread options education.  I'm referring to blogs without the hype.  Those who promise 10% monthly returns are the problem that we professional option traders/writers face.  Lies, hype, expensive seminars and suckers taking the bait…  All of them contribute to the bad reputation for options.

All someone like me can do is try to tell the truth.  Options are a risk-reducing investment tool. Options can be used to increase the likelihood of earning money.  But this is not risk free.  It requires an education (that does not have to be costly), patience, practice and discipline.  It requires the ability to understand how to manage both money and risk.  Not everyone can do it.  That's the truth. Why isn't that publicized?

The connection to forex above?  A professional business writer and friend once carefully explained why she had so much hesitation in writing about options for her readers. 'First, do no harm' is her mantra.  And I agree with that.  Don't explain options so that they appear to be so attractive that people may rush out and do exactly the wrong thing.  That caution is understandable, and there is only so much information that can be written into a single newspaper column.

I accept the fact that saying nothing may be better than making the attempt to truly provide education.  However, that same friend recently wrote a positive story about forex trading.  Do no harm?  Forex trading is the biggest hustle out there.  Sure, superb traders may be able to grasp the intricacies or use technical analysis to make a living.  But the average investor who doesn't know the difference between the yen and the euro – how is that person supposed to get a handle on forex?  Almost impossible without a huge educational effort.  An effort that has not been made.  There is no attempt to educate.

The common hustle is to receive a cold call from a broker extolling the virtues of his system and why it's so profitable.  I always ask:  If it's so profitable, why are you making cold calls to earn a living?  That ends the conversation.

Seemingly responsible people seem to have no trouble with forex trading, but consider options trading to be risky.  The absurdity of that boggles my mind.  I find it very upsetting.


I share some of my basic philosophy and thought on the markets in: Lessons of a Lifetime: My 33 Years as a Professional Options Trader.  Available as an e-book ($12) or Kindle version ($10).

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7 Responses to Why are Investors Afraid to Trade Options?

  1. rick forno 09/06/2010 at 6:18 AM #

    Forex trading, from what I’ve seen in its advertsing, seems to be positioned as “tradertainment” here in the USA. It’s big marketing gimmick seems to be “24×5 trading hours.”
    How many folks moving into fx (let alone trading in general) do their homework on things like exchange rates, geopolitical repercussions, and so forth that directly influence fx, mostly in the overnight hours? Moreover, how many folks jumping into fx realise how technically rigged the OTC fx market is with robots and algos? Or that in many cases their ‘order’ never leaves their broker but is handled internally? Or that many fx shops cantrade against their customers? If one thought “stop runs” were annoying in the /ES world, it can be brutal in the fx world.
    Yes, I’ve traded OTC fx on some exotic pairs and done well. However, I normally stick to the fx where futures are offered on the CME — the major pairs — where there’s a bit more transparency and trust in the market. Sure, it “costs” more in terms of margin to run a bunch of emini contracts, but that’s a tradeoff I’m willing to take.
    But you can trade FX mini-lots for something like $100 to open an account, and there’s no spooky “greek” codes involved. Just buy or sell. How’s that for a low barrier to entry into a casino?

  2. Bill Burton 09/06/2010 at 6:56 AM #

    Great post. I continue to shake my head at how it is the “sizzle” of the potential leverage of options on which many writers focus instead of the “steak” of risk reduction.

  3. rick forno 09/06/2010 at 7:14 AM #

    Very true, Bill.
    One of my favourite trading adages – and one that I apply in my non-trading career work is that “amateurs focus on the possible rewards; professionals focus on the possible risks.”

  4. Mark Wolfinger 09/06/2010 at 7:48 AM #

    Pretty low barrier to entry. Scary, isn’t it?

  5. Mark Wolfinger 09/06/2010 at 7:49 AM #

    Sizzle sells. That’s the bottom line.

  6. Mark Wolfinger 09/06/2010 at 7:50 AM #

    A very useful adage; one that I may be tempted to borrow.

  7. Bill Burton 09/06/2010 at 11:12 AM #

    For sure. But it burns too.