Options Trading: Gambling or Misconception

July 12, 2022


advertisements that promise option trading can make you a billionaire in weeks or hundreds of percent in days! Such adverts frequently entice throngs of hungry, impoverished gamblers to their extraordinarily pricey seminars in an attempt to repay their loans or other losses through that "one big win."

Trading Options Gambling or Misconception
Insidetheapolloproject: Trading Options Gambling or Misconception

Misconception about trading options

There is a widespread misperception that trading options are similar to gambling. On that, I would strongly disagree. Trading options is not gambling; rather, it is a technique to lower your risk if you know how to do it or can follow and learn from a trader like myself.

In spite of this, I believe that trading weekly options is like going up to the roulette table in Las Vegas, picking a random number, and hoping for a long shot to win.

For average investors, options are one of the most confusing components of investing.

95 percent of people who attended such seminars, paid for them, and then engaged in option trading lost everything. 3 percent will initially profit in the first few trades but ultimately lose everything. 1 percent will actually succeed in making a living, and one more unlucky 1 percent will make 1,000% in their first month (again, just to lose it all within the next month). Anyone who has been in this situation typically believes that options trading is nothing more than a bet on an asset with no intrinsic value.

However, a lot of expert traders and fund managers are consistently generating money using options trading! These pros (including myself) continue to make a living in the markets month after month and year after year even if they don't make 1000 percent a month in profits and never will.

What, therefore, separates option trading from gambling for individuals who lost everything attending option trading seminars from serious investment and trading for these professionals?

The attitude is different. Decisions and behaviours are governed by attitude. Anyone who approaches option trading with the mindset of "getting rich quick" will also quickly discover that they are "getting poorer quick," simply because these traders, hoping to "make-it-big" on their next trade, completely reject any semblance of a trade management strategy, totally cast aside sensible analysis in favour of a 50/50 "bet," and take completely senseless out of the money positions that either make it big or expire completely worthless!

Real option trading professionals balance the possible risk of underperformance by applying a prudent money management plan to every trading opportunity. Therefore, a genuine option trader will never invest all of his capital in a single large out-of-the-money position! Real option trading professionals use trade analysis techniques based on tested methodology to increase their chances of success and never approach each transaction as a 50/50 proposition. To ensure that his portfolio is never over-leveraged, a real option trading specialist determines the amount of options leverage to be employed on each deal. The goal of a real options trading professional is not one massive home run but rather a string of smaller victories that stack up over time. They do not anticipate winning large on their next trade. Because he respects the market with respect and is aware that no matter how much study has been done, there is always a potential that the market will move against him, a good options trading professional never allows one loss to completely wipe out his account.

In a word, a gambler (who rarely lives for more than a month) differs from a real options trading professional (and an option trading winner who stays in the game for years) primarily in terms of mental attitude! Options trading, which is a reasonable and complex financial product, is reduced to nothing more than lottery tickets when approached with the wrong mentality.

The issue with the majority of option trading seminars today is that they don't combine these essential components of profitable option trading! All they discuss is how anyone may quickly get wealthy through option trading. It's like showing someone how to buy lottery tickets in line! Real option trading systems include all of the essential components for successful option trading, including systematic opportunity identification, opportunity analysis in light of the required trading horizon, option selection that is appropriate for the opportunity's requirements, risk-adjusted trade management, and more! The Star Trading System, which I have been teaching for years online, is one such option trading strategy.

So, isn't it time you examined your mindset and strategy for trading options?

Hidden Gambling Tendencies

If it turns out that they are in fact acting on gambling urges, it is highly likely that somebody who believes they don't have gambling tendencies will not readily acknowledge to having them. However, understanding the driving forces behind our behaviour can influence how we choose to act going forward.

One propensity is obvious in many people before trading even occurs, therefore let's focus on gambling habits when really trading. Traders who gain experience and become frequent market participants still face the effects of this same motivation.

Social Proofing

Even though some individuals may not have any interest in trading or investing in the financial markets, social pressure forces them to do so. This occurs frequently, especially when many people are discussing investing in the markets (often during the final phase of a bull market). The urge to fit in with their social group is strong. They invest as a result to avoid offending, disregarding, or making others feel excluded.

If people truly know what they are doing, making some trades to please social pressures is not gambling in and of itself. However, engaging in a financial transaction without a firm grasp of investments is gambling. Such people lack the knowledge necessary to influence how profitable their decisions will be.

Contributing Gambling Factors

There is a learning curve once someone gets involved in the financial markets, which based on the social proofing debate above may seem like gambling. Depending on who you ask, this may or may not be the case. Whether a person becomes a successful trader or stays a perennial gambler in the financial markets will depend on how they approach the market.

The next two characteristics—among many others—contribute to traders' propensity for gambling.

Gambling (Trading) for Excitement

Even a bad trade can leave you feeling powerful or satisfied, especially if it was tied to social proofing. Losing money on trade will enable a person to engage the conversation with their own tale if everyone in their social circle is losing money in the markets.

When a trader trades for fun or for social validation, they probably aren't trading methodically and with experience; instead, they are likely trading in a gambling style. Trading the markets is intriguing because it connects a person to a global community of investors and traders with a variety of perspectives, histories, and ideologies. However, getting distracted by the "concept" of trading, the thrill, or the emotional highs and lows is likely to prevent one from behaving in a scientific and systematic manner.

Trading to Win, and Not Trading a System

In any odds-based situation, trading in a scientific and systematic manner is crucial. The most obvious motive for trading would seem to be to gain profits. Why trade if you can't win, after all? However, there is a secretly harmful weakness in this belief and trading.

Trading to win might actually push us further away from the main goal of making money, even though that is the desired outcome overall. The following situation is likely to occur if winning serves as our primary motivator:

Taylor purchases an oversold stock. Taylor is in a bad position as the stock keeps declining. Taylor keeps holding, hoping the stock will recover so they can make a profit (or at the very least break even) on the deal, rather than realizing the stock is not just oversold and something else must be happening. The trader is forced to stay in losing positions because exiting them would mean admitting defeat due to the obsession with winning.

Good traders lose a lot, but they also acknowledge their errors and minimize the harm. They can be lucrative across a large number of trades since they don't have to win every one of them and they can take losses when the situation calls for it. When a trader maintains losing positions after the initial entry conditions have altered or become negative, they are no longer following basic trading principles and are instead engaging in gambling (if they ever were).

Onkar Potadar

I bring you the latest happening in Technology and digital world. I also talk about crypto and commodity trading.