The recent global market crisis caused many options traders to lose their fortune. Increasingly, there are people who refer to options trading or derivatives trading in general as gambling. This is probably due to the large number of options traders whose positions fell to zero, taking their entire account with them.
Did stock investors do better?
Many pensions and individuals held significant positions in GM before the 2008 crisis began and intend to keep it as “investment” rather than speculation. But look where GM is now … just a dollar. Didn’t those “investors” lose their shirts too? Shouldn’t stock trading or stock investing be a game?
So what is the game?
In essence, putting money into something in the hope that it will do well when you can’t do anything about how that thing’s price movement UFABET moves is gambling. Relying on an uncertain future outcome for profit or loss is gambling! That includes “investing” in stocks, options trading, futures trading, warranties, and so on. How different are horse bettors who “analyze” horse performance and then place their bets hoping for a result?
Accepting the fact that betting on an uncertain future outcome with money at stake is BETTING is the beginning of trading and investing.
How do high-risk professional poker players make their living and their profession from a game of “gambling”? The real secret is risk management. Risk management is what takes options trading from the realm of gambling to the realm of investing.
The beauty of options trading is that the risk can be hedged and the position can be sized based on risk management needs. To take the simplest example, don’t buy more calls or put options than the amount of money you are willing to lose! Watch? Option traders who cannot accept the fact that trying to predict the future outcome is gambling, who like to think in terms of “sure profit”, will put all their money in one position and lose their shirt. And then cry because options trading is a game. Yes, options trading IS game in the sense that you cannot predict the future outcome. 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 risky than buying stocks itself.
This is because you can structure option strategies that benefit in more than one direction, whereas if you buy stocks, you only make money when stocks go up! With the ability to profit in more than one direction, the chances of winning are greatly increased, the risk is decreased, and the trade becomes more of an investment than a gamble! Watch?
For example, a Call Ratio Spread allows me to make a profit when stocks fall, remain stagnant, or rise at a predetermined price. In all 3 directions! Now, how is it to bet now that the exact future result is no longer so important for profitability? With a Call Ratio Spread, I won’t have to be exactly right about the fate of the stocks, because it’s unpredictable in the first place, and still make money! Watch?
Also, due to the leverage afforded by the call and put options, I was able to control the earnings of more stocks with less money! By using only the money that I am willing to lose on a trade, I could reduce the risk and still control the earnings of the shares, which will take a lot more money to control!
Now, options trading is not magic. Options trading can be risky without a full understanding of how each option strategies work and how they work, but once you reach that level of competition, options trading becomes more trading and investing than gambling with the right strategies. Risk management. The point I’m trying to get across in this article is this: Anything that depends on an uncertain future outcome is gambling and that includes options trading and stock investing. However, with proper risk management and hedging strategies, options trading can become much less dependent on the accuracy of the future outcome than investing in stocks, thus becoming more of an investment than a gamble.