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This is a Guest Post by AK Fallible.

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***I screwed up the Apple example a bit because I guess I can’t read. The option expiring $2 “in the money” will give you the 10x return, not the break even. Either way, the probability of getting either is pretty low.

Here’s the full article:


They’re supposed to deliver you 1000% returns overnight, week after week right? That’s what a lot of these internet trading “gurus” will tell you anyway…

But the reality is far different.

Options are a zero-sum game. When one person wins, another loses.

The winners are few.

First you have the highly efficient market makers. These guys set market prices through their expertise in the Black-Scholes model used to derive an option’s price. They win in the long-term by controlling risk and collecting the difference in the bid-ask spreads. In exchange, they provide market liquidity.

The brokerage houses win big too. They skim their cut off every trade and come out like bandits.

And finally you have the “sharps” or the professional option traders that squeeze out a profit over time. Their strategy is the hardest to operate. They aren’t rewarded for providing order facilitation services like the other two participants. Instead, they eat what they kill. Over the long haul they can get as rich as the other two, but only if they size up their strategy and/or attract investor money.

So who’s bankrolling these winning players? The suckers.

The complexities of options are not well understood by most of the retail trading world. Nevertheless, they’re highly attractive because of their limited downside, unlimited upside, and embedded leverage. Who hasn’t thought about buying that call option on the hot biotech stock that returns 1000%? Or the way out-of-the money put on the SPY that triples a trading account in a nasty crash? We all visualize that outcome and crave it.

The lucrativeness of the option market drives retail sheep to the slaughterhouse. They don’t know what they’re doing, and so they consistently lose, funding the winners.

But you don’t have to be a sucker like the retail traders. Options aren’t magic and they can be used to generate attractive returns. But they need to be used in the right way.

As always, stay Fallible out there investors!

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***All content, opinions, and commentary by Fallible is intended for general information and educational purposes only, NOT INVESTMENT ADVICE