Honestly this is why after dipping my toes into this some time back (along with some very limited time spent in crypto without any kind of derivative shenanigans) I came full circle back to index funds and just putting what I can away at the end of the month.
Are index funds going to make me crazy-bonkers-rich? No, but neither was anything else in all likelihood.
What they’re brilliant at is giving me my time and attention back. They’re low risk/reward, and they’re boring. Just like me, as it turns out. Toast to Jack Bogle.
Options in particular are a trap IMO because they require a LOT of active attention to the market day to day, and in the end aren't really worth it. I also dabbled in options a while back, and ditched them after losing much more than I should.
I did learn a lot about the stock market while doing options though, so I guess that is a plus.
It's a trap to follow the advice of investment savvy people that recommend higher risk options without taking into consideration the energy it takes to properly manage risky investments if someone isn't doing it for you. They falsely assume that what works for them (higher risk/return investments and closely following the markets for signals) is what also works for normal people that don't follow markets and financial news very much at all. They mean well and are genuinely trying to help people make the most money possible, but it's a huge blind spot that the time/energy/attention costs of investing aren't also taken into consideration.
It's the same reason I wouldn't recommend Linux to someone that isn't motivated enough to learn how to use it. It definitely can maximize what you get from your computer, but only at the expense of requiring more responsibility and time to learn how it works. Though, it's far easier to get solid Linux advice than solid investment advice and a bad financial decision is way harder to recover from than a bad technology choice.
Your point about the attention required was my takeaway too. I traded paper in college for awhile out of curiosity, and I made a decent amount of "money" doing it too! I was surprised by this because I thought the stock market was insanely difficult to understand and constantly unpredictable beforehand.
It was like that but not as often as I expected. For example, intraday movements could often happen at very predictable times. It can also be very cargo cult. Things like technical analysis seem to work (until they don't) only because enough people believe they will, so the signal to noise ratio can be very hard to suss out.
Ultimately the time required and risk tolerance for those moonshot chances just didn't add up.
> a LOT of active attention to the market day to day
Exactly this. I played options for a while, just with my lunch money, because it was fun. But it quickly consumes your life, you have to stay on top of it all the time. The stress is what made me stop doing it.
This is exactly why I _do_ options trading. I used to only put money into index funds. But it's really boring, so recently I've allocated a very small amount to wheel strategy on a couple stocks I'm interested in. I know it's likely that they'll lose me money, but it's fun.
The reasonable approach to options, if you’re not trying to go crazy speculating, seems to me to be hedging strategies. Or selling options to take a little each sale if you don’t mind the somewhat lesser risk dependent on the type of market at play. All that said, that’s my armchair take as I don’t mess with them outside of Wall Street Raider.
> Want to buy and hold a company but think it's a little too expensive right now? Sell a put, and make risk-free return while you wait.
This is not risk free:)
In your scenario you can either buy the stock at your entry price, call it $100
If you sell a put with a strike of $100 then you do get paid a premium, say $1, for that but if the stock closes at say $80 then you have locked in a loss, there is no risk free return happening in this scenario.
You can try and trade your way out of this but if the stock starts to move against you it will cost you more than you got paid to buy back the put.
Apparently I really don’t understand options. Why would you sell a put and not buy a put or alternatively sell a call if you think a stock is going to go down? Or is this saying you believe it’s too high and will remain high likely past the expiration date of the option? Likewise with your second example.
You can sell a put at a strike price you believe is reasonable and collect the premium for guaranteed.
If the strike is hit, you've bought in at what you believed was a reasonable price at the time of your contract creation. You may technically show a "loss," but you're getting something you wanted at the price you wanted.
If you buy a put instead you're effectively saying you strongly believe that the stock will fall to $x, and in this case, the fall to x will generate more money than the cost of the premium.
The second scenario is hard to get right because the option already has the statistical behavior of the stock priced into the premium. Your knowledge needs to be better than the collective knowledge of the market to make this viable
The idea is that you have a specific entry price in mind and are waiting until it drops to that point. While you wait, you can collect a premium from selling the option. Let's say that based on your assumptions you think stock X would need to drop to $6 for you to make a good enough risk-adjusted return, but it's currently trading at $7. While you're waiting for the price to drop you could sell a Put (generally a cash-secured put) to collect a premium. If the stock price drops below $6 within the duration of your option, you'll get assigned the stock at the price you wanted ($6), but if it stays above this price the option expires worthless and you keep the premium.
There's too much detail to cover in a short comment, but the main risks with a strategy like this is that the price drops well below your strike price and you're forced to buy the stock at higher price than the current market value. For cash-secured puts, you'll also need enough cash in your account to cover the purchase of the stock at your strike price. That said, depending on your mindset and goals, this can be a way to generate income while waiting for the right price.
The opposite side of this also applies for exiting positions. You can sell calls on a stock you own (covered calls) to collect a premium while you wait for the price to reach your chosen strike price. The risk being the potential that the price blows past your strike price, your shares get called away, and you don't get to profit from the extra gains above the strike.
What you describe is directional trade (aims to capture up/down moves in underlying).
Investment banks usually trade in volatility space, also called delta hedged.
Main idea they would sell options (calls or puts) by adding extra premium to the fair price. At the same time they make the whole portfolio delta neutral by buying and selling underlying instruments on daily basis. By having significant portfolio one could expect to leak less on the hedging process and may be use some correlation between underlyings and use index futures instead of individual stocks. The whole business is to capture the premium mentioned above without predicting up or down move.
Selling a put can be thought of as similar to a traditional limit buy order.
For example say you think Meta is a buy at $90. But Meta is trading at 109.57, so sell a put with a strike of $90 and collect a premium in return for agreeing to purchase a stock at $90. If the stock hits 90 or below the contract will be executed and you will purchase the shares at $90 (same as you were going to do with a limit order).
If it doesn't hit 90, you still pocket the premium.
Note that this means that, in a more extreme case, if Meta drops to $40, you still have to buy at $90 via the option, realizing a loss of $50 per contract.
It's getting paid for taking on risk. A limit order will execute at your level or better, not worse.
I'm a little sore from the market this year (but less this morning, when my ITOT total US stock market index ETF blipped up 4.8%). And I kinda regret that all my AGG (US bonds index ETF) followed advice to be placed in a tax-advantaged account (where it not only didn't take the edge off equities being down, but I can't even tax loss harvest it).
But Bogleheads is still looking like the best school of thought.
It's fun to me to stock pick and I rather enjoy it fully aware of the risks. My solution is to set aside a small amount for this purpose and the rest, as you said, put away into index funds.
That was basically my conclusion after looking into it for a while. There are countless ways of designing an options trading strategy to bet on exactly what outcome you feel is going to happen. But at the end of the day, I couldn't get past that it was all based off of just that: feelings. And that while I could be monkeying around with options trading and timing, I would be missing out gains realized by just being in the market.
I read "The Simple Path to Wealth." But honestly, the TL;DR is pick a low-cost broker (like Vanguard) and put your money into something broad, such as VTI for the United States stock market. You could also mix in a world index and bonds, but the expected return on both are lower. All about your own risk tolerance.
Just in case I missed anything...
When you consider compound interest, it's not assuming you reinvest that money or anything. You just pick an index fund and keep adding to it every month for years and that's enough?
Yeah do DRIP (dividend reinvestment) as they'll periodically pay out dividends as cash. DRIP will automatically buy more shares. In a taxable account every time you sell you lose some to taxes, hurting your compounding, so stability is especially important in taxable accounts.
As you near retirement age you'll want to slide it towards a more conservative mix; you don't want a 50% stock market crash to add a decade to your career.
I’m not an expert so someone correct any of this that is wrong, but there are broadly speaking two types of funds:
Accumulation and Distribution
Accumulation funds will do the reinvesting internally, so they really are set-it-and-forget-it vehicles.
(Distribution units hold the dividend returns as cash, i dont use these, I’m not really sure why anyone would but I assume there’s a tax reason somewhere).
The idea is just: invest in an index fund, highly diversified, cheap. There are some variations, like using an equity and bond split, but you can just get a world all cap stock ETF and sit back.
That's all. It's hard to accept you don't need to know more than this, but it's what most people should be doing.
Basically it’s just invest consistently over a long period and for all purposes forget about the money (or at least consider it in your mind to be beyond use).
An index fund is as close as investing gets to a savings account. It’s not a savings account, and will go down if the market does - but the logic is that unless you think it’s the end of the world then it will recover. So you just play the long game and end up retired comfortably (and probably early, depending on when you start and how hard you go at it).
Put the 8% you can reasonably expect into a compound return calculator and it’ll give an idea of what to expect. It’s not clairvoyance though - things (good and bad) will happen along the way and the numbers will adjust accordingly from the guesstimate.
The way to get rich by options trading is to make a market in them, to aim to be as neutral as possible on your greeks and to take bid/ask spread, and to do this with extremely high-quality real-time risk analytics systems, first-line trading oversight and second-line risk management oversight. In other words, it's to be an equity volatility trading desk.
Don't forget their massive investments in technology to be the first for those pennies (high-frequency shops, custom machines colocated at exchanges, etc).
There are also specialist market maker roles for specific products, which don't have to use these systems, but those are professionals in niche markets too illiquid for the big shops.
As of 2008, options market makers are not allowed to naked short. [0] The only remaining exemptions to restrictions on naked short selling are for equity market makers. These market makers are still subject to delivery requirements (T+2). Plus, most/all aim to end each day flat
I've heard this strategy referred to as "picking up pennies in front of a steamroller" - it works until the CEO is discovered to be a fraud, goes to jail, and stock loses 80% of its value in a week. Then you lose everything on a single position.
Market makers do this as a free way to cover delta risk in that direction. If you have +100 delta, selling 100 "units" (way out of the money options) is a nice way and doesn't carry any other greeks.
I've seen speculators do this, but they're playing with fire. I've seen an investor risk 9 digits to pick up $50k a minute before strike expiration, not realizing that the actual settlement is the next day (so adversarial events can still happen).
... generally that refers to the strategy of writing (far) OTM options.
Like: the Dow is currently trading at about $49.44; and the bid/ask on a Nov 18th put with a strike of $40.00 last traded at $0.04. So you can write 25,000 of those and get $1,000 in premium. Those are the pennies.
You can't lose any money unless the Dow actually below $40.00 because those options will expire worthless. However, if the Dow goes to $39.00 ... then you'll be on the hook for $25,000. That's the steamroller.
I am not a fan of Taleb these days (he went off the deep end in conspiracy land), but it's worth reading his "Black Swan" book.
These tail risks are impossible to predict, and volatility of volatility of these events is incredibly high. So your expected value is better to think of as a "very broad range with a positive mean" - are you comfortable with this?
It's advice for a retail trader on what they are up against, and it confuses me greatly on how retail traders can look at all of the evidence that they shouldn't, and they still do.
It's a misunderstanding to think that retail traders are "up against" the trading desks of the big market makers: that implies that they're playing the same game, which is not the case.
The goal of a market maker is to trade as much as possible, on either side of the book, with the widest possible spread that remains competitive, while keeping within risk limits.
Most retail option strategies are based on beliefs about the behaviors of the underlying. Like, I think this stock is going to go up, so I'm going to trade a strategy that makes money when that happens (probably with some leverage, and hopefully with some downside protection).
They're not thinking about smile and calibrating stochastic volatility models and looking at their cross gamma and trading OTC exotics to lay-off their risk.
One strategy depends on discipline, scale, operational excellence, deep quantitative analysis and risk management. The other depends on clairvoyance.
Is there any data that suggests retail options traders should not even attempt to be clairvoyant because "if this, then that" logic to the underlying instruments price and its movement is too naive to be successful, or
does a lot of the "technical analysis" (support/resistance, moving average crossover, volume/volume weighted average price, etc.) become a self-fulfilling prophecy?
there are other members that make up the market + its daily volume other than market makers. i agree, it isn't (or at least shouldn't be seen as) market makers vs retail traders. market makers don't care about direction from what i understand.
it's the high frequency trading hedge funds/funds running algorithms against institutional "whale" investors versus... i'm not even sure i can pretend to understand all of the participants that trade shares (or options) daily/weekly/monthly/quarterly.
there's a portion of psychology manipulation to it as well, right? "oh my gosh, this is going up but it might be a bull trap" aka... some people believe there are entities/an entity behind the scenes driving the price up to "suck people in", and vice versa (bear trap).
>Is there any data that suggests retail options traders should not even attempt to be clairvoyant
The market makers and other participants are not playing the same game, but they are playing in the same market; and that is ultimately zero-sum. If the market makers are making money on your transaction costs, and they're profitable (which they are) then there's already some signal there, surely?
I find that my perspective is generally recalibrated each time I observe a professional or professional organization in a field where I think I mostly understand how it works.
It takes seeing how some of the second-order effects matter in order to get an inkling of just how much you don't know.
As an approximate programming example, imagine the difference in productivity between a programmer coming out of high school and someone with a couple decades experience with access to version-control, profilers, documentation, a clear understanding of best-practices, who works on a team of five people who will all do the same job, and has access to $1M in AWS credits.
Can the young programmer compete? In principle. Can they deliver on time, every time, for their clients without making a gaffe like the team of programmers can? Probably not.
Some small percentage probably can and it is easy to fool yourself that you are doing better than you are (especially prior to 2022 when most things with retail interest just went up for over a decade).
Exchanges are legally obligated to provide the best possible buy/sell quotes to people, so this is not gonna work.
For illustration purposes, imagine you own shares of a ticker that trades around $150/share, with a bid-ask gap of $1. So the lowest sell order is sitting at $150.50, and the highest buy order is sitting at $149.50.
Now, imagine you queue in your way out limit sell order at $200, and then some unsophisticated trader submits their limit buy order at $201. Your limit sell won't trigger, until the entire queue of sell orders sorted by increasing prices (starting at $150.50) gets filled first. If that unsophisticated trader wanted just one share, they will get that one share at $150.50.
The whole idea of a limit buy order at $201 is that it will execute at the cheapest available price, as long as it is below $201. Similarly with limit sell orders, your $200 limit sell will execute only at the edge of bid-ask gap price, as long as the cheapest available ask is at $200 and meets the bid at that number. Until that moment, for every buyer, the queue will be processing all the cheaper ask prices first, until it chews through all of them (which would pump the stock enough to reach your limit sell price).
The width of your spread should be inversely proportional to your certainty about the price level.
If you are an unsophisticated maker, you have to quote wider, and yes you will probably get hit very very rarely. But occasionally someone comes through and just needs to unload something as quick as possible, and they will put in a market order to basically take the whole one side of the book and trade down to your level.
Obviously not super profitable, but not losing either! If I knew an easy way to make markets as a retail trader and be wildly successful, I wouldn't blab about it ;)
That is one way/the best way to make money options trading.
Is there any wiggle room in that statement for the alternative? If retail options traders come out ahead winning overall 15% of the time... is that worth pouring time into? It becomes a personal decision on whether you should risk your resources/time given those odds.
The question I have is... why do some people win and some people lose? It can't just be luck.
For every option and share bought, there is someone who sold it on the other end. Doesn't require much insider trading, given that for every trade that went poorly on one side, it went well for the person on the other side of it. Whether it went poorly on the sell or buy side, it doesn't matter.
Given this, you can see why there are just actual purely statistical reasons for tons of trades going well with zero insider trading needed for that. Half of them are bound to do well. Whether you can consistently stay on the "good side" of your trades is a separate story, though.
P.S. Not trying to deny that insider trading exists, but its prevalency tends to be extremely overblown.
> small-time investors are being systematically fleeced
Anyone buying options in the hope of getting rich is a speculator, not an investor. While they might lose money, they aren't being fleeced.
> And if adjustable-rate subprime mortgages were the oppressive product of the Great Recession, options trading might’ve filled their shoes for the current downturn.
This makes no sense to me whatsoever.
> wide bid-ask spreads that incur immediate losses for options traders.
A wide bid-ask spread might give you bad fills but that doesn't mean you incur an immediate losses. You might even turn a profit!
> To be clear: losing in the market is one thing, but managing to be systematically fleeced at a time when all boats were rising
Again, claims of people being fleeced proffered without any evidence. Buying options has a different payoff compared to buying stock. News at 11.
> Within that machine, encouraging or allowing leveraged options trading on short contracts among retail investors should be considered nothing less than criminal.
I'm not seeing what is supposed to be criminal here.
There's no attempt to explain how options actually work or why people lose money trading them. All we have is handwaving and conspiracy mongering. But I guess that's totally on brand for Jacobin.
You didn’t read the articke, did you? According to the study cited in thr articlr People on average loose 4.5% a month:
> one longitudinal study of nearly seventy thousand Dutch retail investors. The findings back up the story of the current wasteland of retail traders over the last two years. Over six years, researchers found that retail investors who participated in options trading lost, on average, 4.5 percent monthly, more than halving their accounts within a year.
Right, I quoted multiple sections from the article without reading it.
Options trading is zero sum. Add in costs and for a retail trader (not investor) it becomes negative sum. It's not surprising that retail traders consistently lose money. I'm still not seeing the systematic fleecing.
I think the issue is it's investing adjacent so theres the risk of people seeing it as an investment, or at least > a zero sum game, where I fact it's < a zero sum game.
It's also an open question whether non sophisticated traders / investors should be allowed access to more complicated investments. For me leveraging falls on the wrong side of the line. We saw what happened in 1929.
You're probably not going to get instantly rich doing any kind of options trading. The story of an average guy who randomly makes a big bet, times the market perfectly, and quickly turns a few thousand dollars into a few million happens once in a while, but is incredibly rare.
That said, some kind of options trading can be less risky than just holding stock because you can do things like collecting premiums until your target price is met. There are low risk strategies like the wheel that basically guarantee you income for doing nothing but being patient.
"There are low risk strategies like the wheel that basically guarantee you income for doing nothing but being patient."
I haven't found any. And every time an option trader tells me about their "low risk" strategy I see a disaster waiting to happen. The "low risk strategies" of option trading are usually strategies where you make a bet that will give you a low income if things go about the way they have been going about for the past couple of years, and massive disastrous losses if a very unlikely seeming market event happens.
The problem is that the market loves serving up unlikely and impossible seeming events. So really what you think is a low risk income strategy is actually you providing insurance to someone against an unlikely but an entirely possible event without you pricing in the risk of the event in your insurance fees. Because you have managed to convince yourself the event will not happen.
For example, a couple of years ago people were so used to low interest rates that they kind of started believing that interest rates would be low forever. And they came up with all kinds of options and derivative strategies which seemed to generate free money but in reality were bets that interest rates would stay low, or would not breach a certain impossibly high seeming level. Well interest rates went up and in some places (for example, the UK) they hit levels many people thought impossible. And boy were there blow - ups.
More specifically, to your point, "the wheel" strategy is basically a bet against volatility. It will work if the volatility of the primary market is lower than the implied volatility priced by the options market. If not, it will not work and you will lose money. Oh, and if there is one high volatility event, bad enough to wipe you out ... well then you are wiped out. Even if the average volatility was in your favor. So, no, the wheel is not a safe strategy.
If you think you can predict volatility go ahead. But some of the highest paid traders try to do that and get it wrong, so, good luck. But do not fool yourself that you are being safe.
Anytime you're holding stock, you obviously take a theoretical risk. How risky something is is a judgement call that each individual needs to make for themselves.
That said, using something like a wheel strategy on stock XYZ is inherently less risky than merely buying the stock outright because the premiums can at least be collected until your target price is hit.
If you use a wheel, you will lose more on average. You will be guaranteed to sell below market value and to buy above market value. Yes, with the wheel you may end up with a little bit of premiums if your stock goes to zero, but in most cases you end up worse with the wheel than owning a stock. That is because, when you own a stock you buy it at market and when you decide to sell, you sell it at market. With the wheel you end up buying and selling at prices worse than market. And if volatility is high -- significantly worse.
Many option bets have uncapped losses.. If you buy a share of Coca Cola for $60, you could lose $60 if the company goes bankrupt. If you sell a naked call to earn the premium, you can in theory, lose an infinite amount of money.
What is your issue with my comment? What I said is true.
You can essentially guarantee yourself an income. The risk comes from anytime you're holding stock and the stock value decreases, but you can sell calls on that and earn an income on that until a company goes out of business. This type of wheel strategy is inherently less risky than merely buying stock. There's obviously a lot of nuance to even simple options trading and I don't want to write out 100 paragraphs for some casual comment.
That's like saying you can rent out a burning house. It is technically true, but folks usually like to preserve their initial capital while making income.
There Ain't No Free Lunch in options. Covered calls give up potential upside gains for income now. You still have the same downside risk as the underlying stock.
> You still have the same downside risk as the underlying stock.
Taken as a whole, it's not the same exact downside risk because the premium you collect can make up for whatever downside that exists anytime you're holding a stock.
I'm not here to tell you what to do with your money, but all I'd say is that using a wheel strategy is inarguably less risky than buying stock outright.
Right, so in case it's not clear, people are asking you to quantify "basically" and "essentially" with math to get a number out. English words aren't going to make your point. They want you to back it up with a statistical analysis.
> people are asking you to quantify "basically" and "essentially" with math to get a number out
You're hoping to see a specific number? What number are you even asking for? To me, your comment doesn't make even a tiny bit of sense because we're not talking about a specific quantity of a stock at a specific price for a specific time period, we're just talking about the general principles of basic option strategies.
That's the beauty of outlining a methodology. You'll need to answer a few things but most importantly, how do you quantify risk when executing your strategy ie:selling calls?
It feels like you're going off vibes, which is fine, but what's irking people is that "basically" and "essentially" are weasel words that make it seem like you're trying to launder gambling as investing.
Maybe a better question to start with is, which measures of quantitative risk are you familiar with and how to they play into your strategy?
...but you can sell calls on that and earn an income on that until a company goes out of business.
...or the buyer of the contract exercises the option. And yes, there's a lot of nuances, there exercise of options being just one of the nuances. That's why "you can essentially guarantee yourself an income" simply isn't true. Starting with the obvious fact that if it were true, everyone would do it.
Back in the day I used to sell a lot of covered calls on blue chips for this reason. Locking in almost guaranteed small returns that you could churn again and again.
Make sure to factor in the yield which sits ~12%. It's tech based and rising rates make 12% less attractive so the ETF price has expectedly come down. Similar if someone was holding tech stocks and selling CCs against their positions.
I think a major issue is that most people don't really understand the bet they are making. By buying/selling options, you are not just placing a bet on the stock direction, but most importantly on the stock implied variance/volatility.
Since 90% of people straight up suck at high-school level math, I think it's fair to assume that 90% of retail traders don't have the tools to understand derivative trading.
And as someone who vaguely understands the required maths, I already realized there was more productive uses of my time.
I know a lot of professional option traders who understand options and markets without knowing the exact math. Don't ask them about brownian motion, but they know very well how to trade implied vs realized vols and skew.
Not to disparage the article here, just more of an observation in the trend of “now you tell me” financial journalism. I wish these types of articles would surface more at the times people need to hear them instead of after a bubble bursts. It’s easy to take a stance when the mood has turned, but I don’t remember these articles surfacing much during the last height of stock speculation last year. I have no data to back that up so it could be my own biases at play.
The articles appear, but they don't draw the audiences until the problem is apparent.
I remember in 2017 being told by a Wall Street analyst, "It's been ages since anyone's traded in an environment with actually-rising interest rates, be careful." The rise in rates came later than we both though, but I've thought about their comment often over the last year or so.
The knowledge is there, but the appetite isn't always.
To be fair, this is Jacobin and being critical of speculation and financial markets more broadly is kinda their whole thing. Their stance hasn’t changed, it’s just not very well liked around here. I was actually surprised to see this gaining traction at all on this site.
Maybe this is an opportunity for some HNers to start considering perspectives that don’t treat the WSJ and The Economist as sacred texts.
I'll sell options on underlying boring securities. I may cap my short term gains to 15% or so, but I'll get an immediate couple of % points several times a year. it turns a boring blue chip into a less boring blue chip, but going from 8% to 12% is no joke.
Now talk about the times this strategy hasn't worked/the inverse (loss instead of profit) has happened to balance it out so it doesn't sound too good to be true :)
The strategy they are describing (selling covered calls) is actually less risky than holding the underlying. They make more than just holding the underlying when it drops or stays flat, and in exchange they make less when the underlying goes up a lot.
Options are just a tool that lets you dial in the amount of risk you want, they can be set up to be more conservative or more risky than the underlying. The latter is what makes the news.
> The strategy they are describing (selling covered calls) is actually less risky than holding the underlying.
Not necessarily. If you assume the idea is to make money, say a stock is at$100 a you sell a $110 call for $2
The stock then goes to $200.
You have lost $90 of gains to make $2.
That's a huge loss.
Selling covered calls decreases your downside slightly but earning the option premium but it completely destroys your upside by taking away any of the upside beyond the call's strike.
that's much riskier than just owning the stock outright as your downside is capped but yoru upside is unlimited.
At least get the numbers right. This would be losing $90 to make $12.
Using Abbot Labs as an example, a $2 option for 10% over current price would expire roughly 4 months out. So you could make $6/year, and only risk losing the gains over 10% that occur within each 4 months.
The types of stock I'll do with this are generally those I view as reliable, possibly with a dividend (yes, increasingly rare these days), with little exposure to catastrophic downside. This chunk of my portfolio is about minimizing the catastrophic as dollars 1-100,000 have a lot more utility in retirement than dollars 1,000,000 -> 1,100,000.
The problem with this line of thinking is assumption that the OP would hold the stock until it reaches $200. But he wouldn't. He was ready to sell at $110. He is better off selling covered call + shares @$110, then only selling shares @$110. Another problem is the assumption that everybody can sell on the top (in this case, $200), while it's obvious they can't. And since when is profit of $10 per share == a huge loss?
If you think the stock will go up from $100 to $200, don't sell covered call. Nobody forces you to. But if you have sold it, it means you didn't believe stock would go that much up.
If one sells a covered call but is not ready to sell the stock at that price, that's one's problem, not "covered call is a bad strategy" problem.
Isn't the downside to selling covered calls that, not only do you need to hold the underlying, you can get the option you sold exercised, aka you lose your 100 shares per contract?
Yes, so the upside is capped but you get to set the cap based on what call you sell. The bet you're making is that the stock won't appreciate enough for the other party to exercise the call option (so you earn the option premium + underlying appreciation). If the option is exercised you lose some of the gains you would otherwise have made, but you still captured some of the appreciation.
But there is no increase in downside in the financial sense (if the stock price declines you keep the premium).
I watched many friends blow tons of money this way. Even I was tempted and squandered a few thousand on bad bets before I learned my lesson.
The only investing strategy that allows me to sleep comfortably is to buy & hold shares in companies that I wouldn't mind working for. I've also got some small % of the portfolio dedicated to long plays on companies trying crazy ideas that I personally believe in.
At no point do I invest based upon time-series data. I simply pick my desired targets and gradually accumulate shares indefinitely. Every time I tried to get more clever than this, my rate of return suffered accordingly.
Does anyone else find the trope of journalists using "No, ..." headlines condescending to the point of being counterproductive? It feels like this is meant to give a smug sense of satisfaction to people who already agree and it creates reactance for the people who actually stand to benefit from the alternate perspective.
In general I'm inclined to agree, but in this particular case given Jacobin's ideological lean, I imagine they see their audience as being mostly either in the first camp or agnostic as to this issue, with vanishingly few people in the second camp.
I think the argument here is the alternate perspective (yes, I, a retail trader, could hypothetically turn a profit via options) isn’t realistic/viable.
The truth is sometimes people are able to make money on something. Sometimes their returns are going to be eye watering.
But you should know going in that finance is a game for sharks. If your skill is in mathematics, did you go to the best one of the best universities for it? If not, think long and hard about what type of angle you have that others haven't found. There may be a downside that you're unaware of.
But yes, the market can be be beat if you've got insight.
1) be willing to read a bunch of boring shit and make sense out of it. If you can read an sec filing and understand it and are willing to do so youre automatically in the top like 1% of retail. Most people are trading on social media tips and other bullshit like that. If you can figure out how to find and understand real no-bullshit information you're well on your way
2) having a small bank roll. Say under a few million. You now are able to take significant (significant as in, a significant portion of your net worth) positions in ultra small cap companies. Many Institutional traders cannot do this without legal implications they'd rather avoid and so you are competing with a much smaller pool of people, and those people are necessarily less advantaged (in terms of information and access to tools/resources) compared to you.
These are 2 tips that are not shared enough with people wanting to spend a lot of time investing. They're sage advice from many very successful investors who have beat the S&P500 consistently for many years until they could no longer do #2, which to me means you can just sit & retire on your large cap index funds & low risk.
The only thing I would add, is the 3rd thing those people always say. It's easy to make money, it's just as easy to lose it. Make sure you're limiting your down side. Preserving wealth over long periods is critical.
...that a game of Russian roulette wouldn’t be so thrilling if you found out it was a full clip.
Pro tip: don't play Russian roulette with anything involving a "clip" (more accurately: magazine) and even a single bullet[0]. "Revolver" is what you're looking for here.
OTOH, perhaps it is a fitting metaphor for amateurs trading options.
[0] Spoiler: a magazine-fed firearm with even a single bullet in it will feed that bullet right to your brain when you pull the trigger.
Anecdata, but I made an unfair amount with some lucky spins. That was a few years ago, but I immediately understood how stupid my experience was and moved all the earnings into index funds and am scared to ever play options again.
> My position, to be clear, is not a patronizing one that posits people can’t do as they please with their money, but rather that a game of Russian roulette wouldn’t be so thrilling if you found out it was a full clip.
Might I suggest to the author posting some evidence/data that shows retail options traders getting burned? Burned in the sense of having no returns to speak of. Obviously, they're getting burned on bad spreads/lots of commissions (mentioned in the article).
I could be wrong but wouldn't simple logic dictate that... most people stop doing something that loses them money?
If they are losing 100% of the time (aka putting money in, it disappears, they are left with nothing over and over), wouldn't they stop?
Or are they winning just enough to keep them hooked?
I don't disagree. Wall Street = manipulative. Little guy loses. We get it.
But... what's drawing people to Robinhood? The thought of turning $500 into ~$1k+ really fast by guessing something correctly, right?
It's weaponized gambling. My question is, why is it so popular if they supposedly always lose/have nothing to show for it?
> I could be wrong but wouldn't simple logic dictate that... most people stop doing something that loses them money?
Have you ever been to a casino? Everyone knows that the house always wins in the aggregate, but everyone hopes that they're one of the lucky individuals who will beat the odds and win as an individual.
I would guess, in the case of options trading, that it's not the same people being burned over and over again, approaching 100% of the time, but rather enough wins among the losses to keep some people hooked, while they eventually either get slowly drained or, in some cases, body-slammed. Couple that with a steady influx of new, intrigued customers, and there's enough fuel to burn for a while.
And "making easy money" by trading stocks / options / other securities is a far, far better story to tell than "I got lucky at the casino" - which helps lure even more players into the securities casino.
(And, at least in my social group, folks who win or lose at the casino seem to honestly speak of their net gain/loss. Vs. I've yet to hear a single story about making money in securities trading which even hinted at whether the teller's trades added up to a net gain or net loss for the (say) year.)
Some people view it as a form of entertainment, and most people view entertainment as something that is ok to pay money for. Keep it within your budget, and have fun. The exact same could be said for options trading.
I totally agree, btw, that you aren't likely to get rich options trading. But it certain can be a very fun way to test your skills at analysis and predictions.
> what makes options trading fun? the allure of turning a profit
Absolutely, that is a major element of it.
> how is realizing losses fun when the goal was supposed to be to turn profit?
Well, if that is your goal, then I agree that it isn't going to be much fun.
Perhaps you are mistaken in assuming that everyone going to the casino or trading options has "turning a profit" as the primary goal. I don't think that is the case. It certainly never was with me. But I could be unusual ;)
"Have you ever been to a casino? Everyone knows that the house always wins in the aggregate, but everyone hopes that they're one of the lucky individuals who will beat the odds and win as an individual."
The lottery is another good example. How many people bought tickets in the recent $2 billion lottery, knowing full well their odds of winning were close to zero?
You're trying to find rational behaviour in gambling: most gambling is not rational. I don't know of any statistics specific to options, but there's other financial instruments, like CFDs, that have heavy regulations in some countries because of how much people lose: options will probably go that way, too.
For example, if you visit Trading212 and try to use CFDs, you'll see the following warning:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high riskof losing your money.
And yet, Trading212 make huge amounts of money off-of CFDs, despite it being legally required for them to tell people that they will lose their money.
"Ah but those guys in the 83% didn't know what they're doing/aren't following the plan I am/haven't done the course that I have". It's a bit like riding a motorcycle and believing that the injury rate is high because other riders are idiots or go too fast or don't wear proper gear, etc.
Or like the guy at the blackjack table swearing up and down "I have a system" as he loses hundred dollar chip after hundred dollar chip. Some people seem to find the reality that statistics show us unpalatable, and instead of re-interpreting the world around them with actual data, just decide that statistics is bunk instead. And there are strong and monied players that keep trying to push that angle.
> 83% of retail investor accounts lose money when trading CFDs with this provider.
How many retail investors think they can be that 17% though?
It creates entire communities. You start following people who claim to have success/an edge but you can't see any actual statistics on their track record unless you put the time in to follow them. Think paid private Discord servers where you are paying for a tip on a winning trade.
> I could be wrong but wouldn't simple logic dictate that... most people stop doing something that loses them money?
Humans aren't meat-based Turing machines, they're living beings with emotions and impulses. Why do you think gambling addictions are a thing? Or drug addictions? Or any bad habit that we know is bad, but still do it because self-control is difficult?
> they're living beings with emotions and impulses.
Isn't that all the more reason they should stop after they experience the emotions of their first loss?
If all they experienced were negative emotions + losses, they'd stop sooner/retail options trading wouldn't be "such an epidemic".
Therefore, something I feel the article author slightly missed discussing, they win sometimes.
That's the data I'm interested in.
How often does a retail investor, irregardless of predatory Wall Street + high commissions + fees + whatever, come out ahead on an options trade? Once a week? Once a month? Once a year?
If they win 50% of the time and lose 50% of the time, maybe it's not that evil?
My theory is people are seeing the 'winners' post their gains on social media (like reddit /r/wallstreetbets) and so they try and go in and see if they can do the same thing. A lot of these people are in experienced and may not know what they are doing, with many losing money in the process
/r/wallstreetbets was a weird one because there were so many 'winners.' I think on a smaller scale there's a survivorship bias too. In that sense, it's like deciding to play Russian roulette with a full clip because you saw the gun misfire for someone else.
There's been just as much, if not more, 'loss porn' on that subreddit. I think people just upvote the extremes. The middle of the bell curve is uninteresting: "Take it to /r/investing" as they say.
They do. There is no doubt there are a lot more "bagholders" than winners. People most likely upvote the winners hoping "I wish that was me" and keep chasing those mythical wins that seem to happen to everybody else except themselves (mostly). Therefore creating even more losses for themselves, etc.
WSB also has a culture of essentially celebrating big losses. There's no shortage of examples of people losing their entire investments. It's a weird culture.
It's the same reason slot machines, lotto and scratch offs are popular despite their extremely low odds of winning. The dream of the big winner invokes something in us, especially those most susceptible to gambling addictions.
To me, the big draw to options during the pandemic is that nobody knew what would happen. Normally, the little guy gets completely screwed because of information asymmetry. In that sort of environment it's more of a level playing field. Sure, cost were fairly high, but so was the volatility. It at least felt like you had more of a chance than normal. I had one option that I sold at break-even that would have 30x'd to $30k if I just held it two more months. That's a bigger potential gain than anything I'll ever see again, unless I play the lottery.
Now it feels like there's no point to options because things are more stable and the big guys have better intel. I might as well play the lottery - clear odds, no insiders, and less manipulation.
You didn’t read the article, did you? They mentioned a study that people on average loose 4.5% a month, 50% a year:
> one longitudinal study of nearly seventy thousand Dutch retail investors. The findings back up the story of the current wasteland of retail traders over the last two years. Over six years, researchers found that retail investors who participated in options trading lost, on average, 4.5 percent monthly, more than halving their accounts within a year.
No its not so one sided. If you really can lose 100% of the time you can just reverse the positions and make money. Price movements are usually random so you'll make money some times and lose at others.
Why can't the average retail investor come to that conclusion/realization on their own/draw enough conclusions to stay out of the market/not hurt themselves?
Definitely! If one doesn't know at least 4 greeks (delta, theta, gamma and vega), what is volatility crush, what are credit and debit spreads, one doesn't have any business in option trading, let alone in trading weekly options or earnings.
These comments are right on! Options are great, if you take the time to learn about them & spend time making very small bets with them as you learn.
If you use them correctly, they can reduce your risk & increase your upside. I've been learning & using them for a few years as kind of a side hobby. My small options portfolio has outperformed my index fund retirement portfolios that I don't touch in good times & bad.
I wouldn't recommend them though for anyone who needs to read the above article or anyone who doesn't invest a lot of time learning about options & keeping up to date with the companies they're investing in, the overall market & upcoming events that will adjust the mark.
Though I do agree with the article that the goal of options is usually not to get rich but to decrease your downside & possibly add a small amount of income.
There's a part that refers to the research, but the way they describe it sounds confused, like the author doesn't understand the domain. (Or maybe I'm not using the terms in the standard way?)
>Researchers Svetlana Bryzgalova, Anna Pavlova, and Taisiya Sikorskaya found that retail options investors lost over $1 billion during a bull market from November 2019 to June 2021. Their calculations don’t include their estimated $4.13 billion spent on the trading costs, i.e. wide bid-ask spreads that incur immediate losses for options traders. And lastly, we can’t forget the $800 million burned in that time period on commissions.
Wide bid-ask spreads are a trading cost? That incurs an immediate loss? That's independent of the loss quoted in the return? If you (for some reason) do your options trading by only accepting standing bids/asks (market orders), then yes, you get a bad price ... but that would be rolled into the return figures, not an independent loss.
No matter what the bid/ask spread, you can place an order in the middle and wait for a fill.
And commissions aren't a "trading cost" but something that goes in a different (non-trading-cost) bucket?
The biggest beginner trap with options is thinking you have 50/50 odds. I'm buying a call or a put, so I have to have a 50% chance of being right, right?
Nope. You have a million ways to be wrong, and a very tiny narrow window of ways to be right. You can lose your shirt on poorly executed calls, even if the stock skyrockets. You legitimately have better odds walking into a casino and betting on black than buying calls/puts.
That's... wrong as well. You don't need to have a million ways to be wrong and a few ways to be right. You just need to understand that the world doesn't operate on naive probabilities where each outcome is equally likely.
YTD I'm up more than 300% on my options trading account. Options trading is making bets. The way I make bets is in regards to unusual news events. The events that made me the most money this year were Powell raising interest rates in a relatively unprecedented way, the monkeypox crisis and catching the end of the crisis before the mainstream, and the Nord stream pipeline blowing up. I didn't anticipate these events, I just opened positions quickly after they happened before the rest of the market figured out which direction it was going to send the market. I also closed these positions when I read news that meant the impact of these news events were ending. Most of the time there is no trade to be had. There's nothing special that's going on, so I just sit in cash.
Options trading is work. When I have open positions, I have to read a lot of news and get up before the market opens every day and watch things throughout the day with my finger on the sell button. It's not something you can really do while having a normal day job.
this is the catch. you are perpetually in a mental struggle because all it takes is one big bad bet to undo enough of your work that it wasnt worth it. So the options portfolio that you are up 300% on is probably less than 10% of your entire portfolio. Whether it is or isnt under 10% is not actually important, the point is that the stress involved should begin snowballing past that point
not to mention you probably have a decent amount of money liquidated at any given time. for most people it is way for efficient to put the entire portfolio into an index, preferably a tax beneficial account like 401k or roth IRA, and then use all that extra time and energy bettering their workable skillsets so that they can increase their raw income and reduce the odds of unemployment.
That said, when i was unemployed for a year - I did a lot of options/crypto trading because i just had so much time on my hands. Since I've been back at a full time job, it's just too draining for not enough benefit. I can work a few hours of OT and guarantee more money that week than trading would get me, and the OT is way less of a struggle
A warning about index funds, that were mentioned a couple of times in different threads here.
If the investemnt bank issuing the index fund goes bankrupt, you lose your money - see Lehman Brothers.
You can mitigate the risk by buying from different issuers. However, the bankruptcy risks might still be too closely related; in other words: there is the risk of a domino effect of bankruptcies of investment banks in a future financial crisis.
The best thing you can do to avoid this risk is to buy many different stocks and directly mimic an index or other fund yourself. It is not necessary to do this exactly. A random proportional selection of a considerable number of stocks (40+, but the more the better) from the index or fund you want to mimic and adjusting your investment once a year should be sufficient.
Banks generally do not issue index funds / ETFs. They're often the APs, but that poses very little risk to the funds. I cannot recall the last time I saw an ETF that was issued by a bank.
CORRECTION: As others have pointed out, many ETFs secure the investment with a custodian. This makes these ETFs immune to a sole bankrupcy of the issuer. In case of a domino effect or a close interwovenness between issuer and custodian this might turn out problematic nevertheless. But there are many kinds of ETFs, most notably swap-ETFs, that are not backed by real stocks. For these, what I have written applies without restriction.
I have never heard this, is it really true? Most people have their 401k's/ira's in index/mutual funds so it would be pretty devastating if like vanguard or fidelity went under and everyone lost their money... to the point where I don't think the government would allow it to happen, but maybe that's just wishful thinking?
I took a look at a random prospectus to see what was disclosed (For ITOT). It does have some risk that sort of sound like this:
> Authorized Participant Concentration Risk...To the extent that Authorized Participants exit the business or are unable to proceed with creation or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem, Fund shares may be more likely to trade at a premium or discount to Net asset value and possibly face trading halts or delisting.
I tried reverse engineering options trading and day-trading for a net $200K/year profit trading 4 days/week and 45 weeks/year. I think I determined you'd have to trade at least $60K/day and not lose. But I'm honestly not even sure I was right.
so what's the alternative? invest in mutual funds that don't beat the market and take a hefty % of your compounding returns due to management fees? crypto? getting a house like the prior generations?
Well we let the previous generations murder any possible way of building yourself a better future for like 4 decades, what did we expect? Turns out optimizing for grandma's continued wealth increase is harmful to basically everyone else.
You want something to protect you in the future? Vote.
I understood that options trading is zero-sum: to win, someone else has to lose. In this sense it’s like gambling, also in that the house always wins because they collect the fees no matter what. Like gambling I’m sure there are plenty of people with success stories too. Is this assessment wrong?
With the fees, options are (slightly) negative sum.
I'm a boglehead, but as I see it there are only 2 valid reasons to consider option trading:
- Hedging: e.g. if a big part of your comp is in illiquid private stock in a company whose outcome is highly correlated to IndustryX, you may want to hedge that with options. Not positive sum in absolute terms but you're paying to reduce risk.
- Tax arbitrage: e.g. On a block of stock you got from an IPO. Positive sum from your perspective.
Both are a lot of work to do right and neither one is a silver bullet.
Yes, by definition one option trade for puts or calls with extrinsic value is zero-sum as with no other trades, the final settlement price zeros out the extrinsic value.
Many options trades are done in combination with other products, however, which allows for non-zero sum.
Not if you factor in risk aversion and declining utility. Most investors would happily give up some upside for downside protection. This is where option strategies are not zero sum
I read a lot of positive opinions in this thread about index funds. Consider for a minute how much money has been flowing into <= 500 companies due to S&P500 index funds in the last decade.
My guess is that we're about to see a bubble pop over the coming recession that no one realized was there.
There's very little money "flowing into" the companies on the S&P500 by virtue of their inclusion. Buying a share of Coca Cola doesn't give money to Coca Cola, it gives it to the previous 3rd party owner of that share. With the exception of new share issuances like IPOs, the share price of a company is mostly irrelevant to the cash position of that company.
I don't know if it's a bubble per se or more like the Social Security system in the US. It will be interesting to see what happens to these index funds as the younger portion of Boomers and older Gen X retire and start drawing down their 401(k)s and other accounts. Older Boomers had pensions, so weren't as reliant on amassing personal savings for retirement, but that's far less common as you move into younger populations.
Frankly, just reading the headline, I disagree. First of all, yes in a broad sense most people are gonna get fucked trading options if you don't know what they're doing. I know what I'm doing and my strategy is exclusively long equities. But you can absolutely make metric fuckloads of money trading options and there are some trades out there that ain't that hard to figure out. For example, you can print money on a regular basis trading puts on UVXY when volatility spikes. You just need to understand what you're doing. Now trying to predict earnings and all that bullshit -yeah that's a suckers game. But there are plenty of options strategies that can make retail traders a lot of money.
(BTW you may ask why I don't trade uvxy options if I'm so confident in its profitability - well I can't conduct the above mentioned strategy without violating regulations because of my occupation. But I did prior to my employment and consistently made double digit % returns in 1 trade every 2 months or so.)
To be clear I was talking returns on the trade - not returns on my portfolio. The distinction here is that you could not throw your whole bankroll at this trade, because there is limited liquidity on both sides of the trade : e.g. when uvxy spikes, you are buying from the hand full of suckers that are willing to sell cheap puts. When it starts to trend back down, you are selling to the hand full of suckers that are willing to buy expensive puts. I was trading positions worth under 5k with this strategy when I was getting those returns. So yes, you are correct, this sounds too good to be true cause it is. you wouldn't be able to pull this strategy off with much more than what I was trading because the liquidity just wouldn't be there, so you could not compound these returns over time really, it would be a constant, fairly reliable source of high returns on a small amount of capital.
And the offer was for a job in the industry that would afford me the opportunity to learn a lot more about investing in general, especially about volatility based securities, while I was on the clock. It roughly doubled my salary too, so it was hard to pass up.
I feel a sort of gambler's mindset here as well. I'm sure you can get the occasional double digit percentage return every couple of months, but it is also couple with a lot of losses as well.
Definitely has the potentially for loss, but it was pretty damn consistent while I was doing it. As awful as it is, this trade is basically just taking advantage of retail options traders that fundamentally don't understand how UVXY works
I learned this when I got fleeced in the '17 crypto bull and bust. When there's music, it's okay to trade. You're probably going to make money just by accident. But when the music stops, leave immediately, take the bit of money you made with you, and don't look back. It's so easy to stay greedy after the music stops and you're no longer at peak profit. I stuck around too long trying to make it back, lost everything I made and then some. Never making that mistake again.
The first sentence already misrepresents its source.
Jacobin claim: "As of this August, ordinary investors, [...], have lost everything they came to the market with during the pandemic." [source: Business Insider article]
Business insider article: "Retail traders have now lost all the money they gained during the pandemic, according to Morgan Stanley"
So no, Jacobin, they didn't loose everything they came to the market with, but they have lost all the profit in a limited span of time.
I knew someone who quadrupled his holdings over the past two years and "got out" in time to keep the vast majority of it. So it does happen from time to time and I'd say going from half million to 2 million is pretty great. I don't have the stomach for it though. However it's just an anecdote, most people people don't have the knowledge (or luck?) to do well other than to make moderate gains.
Plenty of people have got rich off options trading - but you aren't going to. Take a look at the front page of WSB sometimes, every day there are a handful of people who made 6-figures on long shot options --- and then dozens of people who lost everything gambling on slightly different sets of instruments.
It's crazy to me that we restrict actual casino gambling to such a high extent but sports betting and options trading are just a free-for-all.
1) There's no way she doesn't have straight up criminal inside info or otherwise advantageous positions that are literally a crime for anyone else to utilize
2) The lottery has winners too, doesn't make it a smart bet.
This will sound super basic and maybe even trite, but the way to get rich is to hold assets that increase in value. I know it's stupid and basic, but that's the way. Assets could be hard like physical assets or real estate, but those assets trade long-term potential for asset value growth with liquidity. The best assets are the ones that not only increase in value at a significant rate, but also provide cash / income along the way. Then your assets are working for you, rather than you working for your assets. I know, boring and super obvious right?
Assets also include ownership in companies, whether its your own or someone else. The best assets to own are the ones that have the potential to rapidly increase in value, but of course those are the most risky. So the balance is rate of asset value increase over time measured against risk of holding that asset. The best assets are also ones where a third-party can provide a value of that asset, and that asset has a market. The best assets are also the ones you really own versus borrow or lease or have to earn into. Of course, there are ways to borrow assets as a means to actually own and hold other assets.
I know this is stupid and basic, but people get so caught up in swings and moves and trades and plays and options and derivatives and this angle and that angle. But what has worked for me is to buy assets that increase in value, and keep doing that. You can't get "rich" by being an employee and trading your time for money. There's no asset increasing in value. Of course, if you own a piece of the company you're employed in, then what you're working for is to increase the value of that asset, and your income is a cash flow benefit. Likewise, you can't get "rich" by finding passive income. That's great for covering your cash flow and expenses, but there's no asset increasing in value. If you can find an asset that provides cash flow while also increasing in value, that's even better. You can't get "rich" by timing the market. First of all, that's mostly luck, so all examples of where that works can be attributed to luck more than skill, and second of all, there's no asset that's increasing in value.
Oh and one more thing. This is what I realized fairly recently. Venture capital doesn't invest in businesses. It's the biggest head fake there is. They invest in assets, high risk, fast growth assets. Whether that asset generates revenue for the business owners doesn't matter and often gets in the way of the asset increasing in value or slowing down the rate at which the asset increases in value. Whether that asset hires or fires employees doesn't matter (to the VCs). What matters is how fast can their asset increase in value and what is the market to sell that asset. Sometimes you have to increase the value of an asset by overhiring, and then by overfiring. Once you realize that VCs invest in high risk high return assets and not in businesses, then it all clicks.
> Venture capital doesn't invest in businesses. It's the biggest head fake there is. They invest in assets, high risk, fast growth assets.
That's a bit too facile. Yes, VCs invest in assets, but the assets they invest in are businesses and not, say, commodities or derivatives or options, which are also high-risk and (potentially) fast-growth assets.
VC's invest in businesses, but not just any businesses. They want businesses that can go from inception to IPO very quickly. Businesses like that are not typical (that's where most people get it wrong) but they are still businesses.
But they don't actually invest in businesses. Yes, the asset happens to be an operating corporation. But the actual business of that corporation is not what they invest in. They're not interested in portions of revenue or profit sharing. What they want is the asset to increase in value, and that asset is their preferentially protected share ownership of the corporation. Whether or not the business is a true business (as in with actual revenues or profits) does not materially matter to VCs, unless that is directly correlated to asset value increase. Perhaps another way to say it is: VCs invest in corporations, but they don't invest in businesses. It took me a long while to realize this, but once you do it all clicks.
> Yes, the asset happens to be an operating corporation.
Not just any operating corporation. A business. Not all corporations are businesses. Not all businesses are corporations. VC's invest in corporations (almost invariably Delaware C corps) which are also businesses.
VCs make equity investments in businesses, and not other asset classes. Saying that they "do not invest in businesses [because] they're not interested in portions of revenue or profit sharing" is like saying that someone who buys Amazon stock is not investing in a business because Amazon doesn't pay dividends.
It is true that buying Amazon stock is different than, say, buying the local laundromat or opening a lemonade stand. But those are all still businesses.
And it is true that VCs don't invest in any old business. If you try to get a VC to finance your purchase of the local laundromat or to start a lemonade stand on the corner they will probably laugh in your face. But if you try to get them to invest in corn futures they will laugh in your face even harder. (And if you tell a VC, "You don't invest in businesses" they will probably write you off as a pretentious idiot.)
VC's invest in businesses. They specifically invest in businesses with high growth potential, which generally means startups. And it's true that what they care about is the growth and not the business details. But they still nonetheless invest in businesses.
Saying "VC's don't invest in businesses" is like saying that Ferrari collectors don't buy cars. There is a grain of truth there: Ferrari collectors don't buy just any old car, they buy Ferraris. But Ferraris are still cars.
Let me word it a different way. VCs invest in their asset ownership of the corporation, not in the business of that corporation. In this regard, I refer not to the legal structure of the corporation nor that VCs obviously invest in legally structured businesses incorporated preferably as Delaware C corporations, but rather I focus on the intent of the corporation (which is indeed a legal business as you've stated above). As an owner of Amazon stock, I'm an investor in my share of their corporation. I earn no part in their actual business, the business of Amazon. In this way, I don't care about dividends or shares of their revenue. Instead, I am looking at the asset value increase in my ownership of a share of their corporation. Perhaps we're saying the same things. The reason why this distinction matters is because most entrepreneurs pitch their startups to VCs as a business, focusing on the business aspects of their corporation, rather than on the value of the asset, which has little relation to the business-side concerns of the corporation. Whereas the VCs primarily are valuing the asset ownership side of the corporation and whether or not the corporation generates business value is not relevant as long as it generates asset value. That's the intent of what I write to shift the emphasis on realizing what VCs truly are interested in.
And to the point on Ferrari collectors. They know that their asset is not a car, it's a Ferrari. They could potentially drive it around, but they don't. So to that example, they're actually not investing in cars, they're investing in Ferraris. You could make the same argument and say, well Ferraris are cars. And I'd say yes of course, but that's not the point. Ferraris could be boats or paintings, and it would be just as relevant. It's the asset value not the functionality they're investing in. That's why I say VCs invest in corporations not businesses, in the same way that Ferrari collectors invest in Ferraris, not cars.
I understand the concept you are trying to convey but you are using the wrong words, and as a result you come across as naive and uninformed. You are making an observation about a VC's motivation and strategy. But the words you are using make it sound like you are talking about the structure of their investment.
There is no distinction between a corporation and "the actual business" of the corporation from the point of view of an equity investor. An equity investor buys shares of the corporation, and that's it. An investor might be motivated to make that investment because they want a return, or they might be motivated to make that investment because they are passionate about what the corporation does, but either way, they buy the same stock. There are not separate investment mechanisms contingent on an investor's motives.
It is true that VCs are motivated entirely by ROI, and this is an important thing to understand, but rendering that as "VC's don't invest in businesses" is wrong. It turns an important insight into a deepity [1].
(I suspect that this particular aphorism models itself after Ray Croc's famous quip that he was not in the hamburger business but the real estate business. But in his case it was actually true. Ray Croc never sold a hamburger. He sold franchises to people who sold hamburgers. That really is an important structural difference, and it's the reason that Ray got much (much!) richer than any of his franchisees. But in this case, the aphorism is flat-out wrong. There is no structural difference between what a VC does and what any other equity investor does, with the single exception that VCs never invest in companies that have already gone public.)
"Like the workplace itself, for most of us the stock market is simply another arena of capital extraction". So, to the author, workplace is an arena of capital extraction. Although the comparison is uncalled for, I'm glad of this candid Marxism because it lets me put this opinion piece in perspective. Given that bias I don't think I'll spend time reading it unless I'm bored.
Are index funds going to make me crazy-bonkers-rich? No, but neither was anything else in all likelihood.
What they’re brilliant at is giving me my time and attention back. They’re low risk/reward, and they’re boring. Just like me, as it turns out. Toast to Jack Bogle.