If Stock Trading is Addictive, Options are CRACK

by Darwin on December 7, 2011

Is it possible to be a stock market addict?  Well, if you are a believer in the numerous other addictions in the American lexicon of late, ranging from sex addiction to internet addiction, then, you’d be hardpressed to say the euphoria and withdrawal associated with stock trading isn’t an addiction for many.  Like drugs and other addictions, in the constant act of “chasing the dragon”, one has to continuously try to exceed the prior high, chasing the ultimate reward which can never be achieved.

So, after trading stocks and losing that buzz, a natural transition is then into leveraged ETFs (which are horrific for most retail investors that don’t understand them) and then finally, derivatives – namely, options.  I’ve written about stock options on numerous occasions, like this investment that pays off 100:1, Black Swan events, and how I made 164% in a single day, and just last week, how I make a few hundred bucks every quarter shorting the US Treasury.

The Data – Options Trading is Exploding

Well, everything I stated above is a concept and my opinion.  So, where’s the data?  Right here.

BusinessWeek did a writeup this week on the explosion in options trading and how all major brokerages are flocking to these derivatives or just buying options trading outfits outright.  What draws investors to options is leverage.  For just a few dollars, you can hold control over an entire contract of 100 shares.  Depending on which strategy you employ, you can actually sell naked options and collect premiums (while opening yourself up to infinite downside risk), buy out of the money options for the prospect of 100:1 or even 1000:1 returns if a low-likelihood event occurs, or even use them to protect the underlying stock you already own.  There are literally dozens of strategies and everyone’s got a story to tell about killin’ it with options.  What you don’t always here are the horror stories.  After all, if it were that easy to mint money trading stock options, wouldn’t everyone be doing it (and hence, options premiums would increase as a result, thus wiping out any market inefficiencies)?

Am I Addicted?

I don’t consider myself an addict, but I will be the first to admit that I do derive some sort of emotional response from making a trade and then tracking its performance.  I’ve been trading stocks and options since I was a teenager and I’ve made plenty of mistakes along the way – which have tempered my enthusiasm for trading in volume.  The one thing I do to keep myself in check is to constantly hold myself accountable, reinforce to myself that markets are quite efficient (not 100%, but very close), and that there are very few trades worth making.  I’ve lost money too many times to either bad trades or commissions, so what I have now is a rather high Beta, but steady set of stocks (see portfolio updates) that I’ve held for a few years for the most part, and some recurring options strategies I employ.  I haven’t made a trade in a couple weeks, nor do I check my trading account daily.  Hopefully that’s convincing enough… but I do know people who can’t get enough and you probably do too.  It can be an expensive habit, especially since most people get it wrong.  To keep it a little less expensive if you dabble though, here’s an optionsXpress promotional code.


Are You Addicted to Trading?

Do You Know Anyone Who Is?



{ 8 comments… read them below or add one }

JT December 7, 2011 at 11:59 pm

I think they really tried to hard to paint it as some evil in the world of retail finance. The writer seemed like he or she really wanted to make the case that options brokers are out to get people.

Obviously I don’t think the average investor should be writing puts, nor do I think they should be writing covered calls (why own a stock and simultaneously bet against it?). But I also don’t think that’s what options traders are doing.

I use options sparingly when I don’t want to own the equity. I did it with Ford because it just made sense to me.

But I wouldn’t use options to add leverage. I’d use them to displace something I wanted to own anyway. If I want 5% of my portfolio in an equity, then I’m not going to put that same 5% of my portfolio in a super-out-of-the-money $.05 call option and wait for luck. That’s stupid. If you can only afford exposure to 100 shares of a stock, then you should only displace it with a single lot of options.

My portfolio is usually made up of <10 securities, and fewer than 2 open options trades. Like you, I'd prefer to hold a core portfolio that I'm happy with for many years. I set extreme margin of safety requirements, assume I'm completely off-base in my analysis and only buy when market valuation is 50-70% lower than my own DCF analyses. Ford trades for 50% of my DCF value, so that's why I went with options. (Also, Europe.)

Super safety…and if it doesn't work out it only cost me roughly 20% of the stock price to protect the other 80% of my money while maintaining at least some exposure to the company.

That makes perfect sense to me. But maybe I'm just an addict in denial.


Darwin December 8, 2011 at 12:17 am

I definitely like all the positive aspects of options you cited. I’m not sure the writer hates options or brokers that much, but rather points out the growing interest and addictive qualities of options trading. I guess it’s like how smartphones further fed social media addiction and whatnot. Where there’s a will there’s a way. Where there’s a market, there will be an outfit delivering that need at a a market rate that’s too good to pass up. I recall during the internet boom, many of my friends (and I) had no idea what we were doing and were trading options like mad. We’ve all moved on for the most part. I guess in that light, we aren’t addicts if we’re no longer partaking in the behavior to that degree. But I think many continue to progress down that road; the numbers seem to speak for themselves!


JT December 8, 2011 at 12:29 am

I guess that makes sense – make addiction easier and more people will be addicted. I think options can definitely be addicting, especially when you start thinking about moving just one strike price up (or down for a put) and your potential ROI explodes.

I’ll admit that the many VIX ETFs and their options can really work up my greediness. An option on a leveraged derivative based on the relative changes in option premiums on another stock index? Sign me up! 10,000% or bust! I always pass, but I’d be a liar to deny the attraction. It’s the small t0 big transformation thing…even if the risk-adjusted odds are out of your favor, turning $100 into $100,000 will always be attractive in some respects. $100 is play money, $100,000 isn’t.


MoneyCone December 8, 2011 at 8:35 am

I was just reading about this yesterday Darwin! There was a mention of how someone raked up $10,000 in commissions alone. I hope he managed to at least break even.


retirebyforty December 8, 2011 at 6:56 pm

10k in commissions? That’s like 1000 trades.. nuts..


Jeff @ Sustainable Life Blog December 8, 2011 at 2:21 pm

I dont do any trading – I dont have the money right now, but I can easily see how people can get wired off of it.


Krantcents December 8, 2011 at 2:32 pm

I love seeing my investments grow and the market go up, but I feel options are a little risky for me. Daily activity such as trading or options is more than I wish to do. Besides, I do not feel comfortable based on my investments skills.


101 Centavos December 11, 2011 at 10:59 am

I don’t know enough about options to be able to trade them. If and when I do, then I’ll venture in.


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