“The benefits are limitless and yet the risk can be tapered.” I have heard this description paraphrased in a thousand ways. To a certain extent, I do agree and I was tempted to allocate some capital into options but I have decided not to in the end. In this post, I will share some reasons and views on options and how trading options might not be investing at all.
Options is similar to gambling
Yes, I understand that options deal with the same stocks that investors buy and own, however it is essentially betting on a single direction of the stock within a certain time frame. It is the same as betting on randomly drawn numbers that have no real correlation with the amount of money you put up for the bet. At this point, I think it is probably debatable because some people buy stock with the same thought process. To that I say, investing does not have a limited time horizon and you will be entitled to dividends and other offers in the case of a delisting. Also, although you only lose the value of the contract if you choose not to exercise the option to buy, these losses are irreversible compare to ‘temporal’ paper losses incurred when owning stocks.
Only available in specific markets
As a Singaporean living in Singapore, I choose to invest in markets that operate in the same time zone simply because I want to have a normal life. Being able to invest and sleep at night, literally, is an important and healthy aspect that I would not want to give up for the sake of trading. So the next time you think about trading options especially in the US market, you need to consider the time zone difference as it might affect your sleep hours on top of the additional stress.
If your capital amount is large enough
Though your risk is way lower buying or selling options, I argue that it is still higher than buying stocks if you knew the counters well. As mentioned earlier, there is a limited time horizon for options and you will forfeit the cost of the contract when it expires. Therefore, it is still adding capital risks on top of your existing portfolio. One common reason why people trade options are because they want to earn more using less capital. That explains why it does not really matter if they do own those stocks so long as they are able to make a profit from their trades.
Closing Thoughts
In short, trading options is not investing. if you were intending to invest your capital in the financial markets, you should always consider accumulating more capital instead of trading options with limited funds. As a rule, investing is not solely about making profits but also making rational long term decisions (without a limited time horizon) because you believe in the company that you invest in.
