The recent global market crisis caused a lot of options traders to lose their fortune. Increasingly, fun888club there are people who are referring to options trading or derivatives trading at large as gambling. This is probably due to the many options traders who had their positions go down to zero, taking their whole account with them.
Did the stock investors do any better?
Many pensions and individuals had big positions on GM before the 2008 crisis begun and fully intend to hold it as “investment” rather than speculation. But look at where GM is now… barely a dollar. Didn’t those “investors” lose their shirt as well? Shouldn’t stock trading or investing in stocks be gambling as well?
So what is gambling?
In essence, putting money into something hoping that it will do well when you can do nothing about how the price movement of that thing moves is gambling. Depending on an uncertain future outcome in order to make a profit or loss is gambling! That includes stock “investment”, options trading, futures trading, warrants etc. How different are those from horse betters who “analyze” the performance of horses and then place their bets waiting for an outcome?
Accepting the fact that betting on an uncertain future outcome with money on the line is GAMBLING is the beginning of trading and investing.
How did high stake professional poker players make a profession and a living out of a “Gambling” game? The real secret is risk management. Risk management is what takes options trading out of the realm of gambling into the realm of investing.
The beauty of options trading is that risk can be hedged and position can be sized to any risk management needs. To take the simplest example, don’t buy more call options or put options than the amount of money you are willing to lose! See? Options traders who cannot accept the fact that trying to predict future outcome is gambling, who like to think in terms of “sure win”, will put all their money into a single position and lose their shirt. And then cry about options trading being gambling. Yes, options trading IS gambling in the sense that future outcome cannot be predicted! It is proper risk management that takes options trading out of the realm of gambling and into the realm of investing and trading.
In fact, with proper risk management, options trading can be much less of a gamble than buying stocks itself!
This is because you can structure options strategies that profit in more than just one direction whereas if you buy stocks, you only make money when the stock goes up! With the possibility of profiting in more than one direction, chances of winning is greatly enhanced, risk lowers and the trade becomes more of an investment than a gamble! See?
For example, a Call Ratio Spread allows me to profit when the stock goes down, stay stagnant or up to a pre-determined price! In all 3 directions! Now, how is that gambling now that the exact future outcome is no longer that important to profitability? With a Call Ratio Spread, I won’t have to be exactly correct on where the stock is going, because it is unpredictable in the first place, and still make money! See?