Why This Popular Trading Strategy Is So Risky

In 2021, options activity hit a record high, with nearly 9.9 billion contracts traded. That was more than 32 percent higher than the previous record set in 2020. This increase in volume can be traced back to the meme stock mania as millions of new investors jumped into the stock market during the pandemic. Options trading is a popular strategy among institutional investors to hedge their risk in the markets, but if it’s not executed carefully, it can lead to devastating losses. Watch the video above to learn how options trading took off and why the strategy can be so risky.

“The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous,” Keith Gill told Congress.

Gill — who goes by DeepF------Value on Reddit and Roaring Kitty on YouTube — testified in front of the U.S. House of Representatives’ Committee on Financial Services in February 2021. He became an influential figure online and is credited with helping inspire the epic GameStop short squeeze. Gill would screenshot his investment portfolio, showing his winnings from his GameStop position.

A lot of Gill’s portfolio consisted of what are called options contracts.

Options are an investment strategy that gives a trader the right to buy or sell a security.

“It’s best to think of options as an insurance product,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

Over the past two years, options have become increasingly popular among individual investors using brokerage platforms such as Robinhood.

“Twenty years ago, if you wanted to trade an option, you needed to maybe call up a broker on the phone, you needed to pay a significantly high amount of commission,” Murphy said. “So there’s much easier access to options markets, and the use of options has pretty much just grown alongside of that.”

If used properly, options can be a good way to hedge risk. But they can also be risky.

“Options are the kinds of bets where you can lose everything,” said Joshua Mitts, associate professor of law at Columbia Law School. “Unlike a share of stock, where you might see your portfolio go down by 5[%] or 10% in value, when you buy and sell options, you can lose all of your money.”

“[Options] in and of themselves are not bad tools,” said JJ Kinahan, chief market strategist at TD Ameritrade. “Fire is a wonderful tool. If you don’t know how to use it, it’s going to end poorly.”

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Why This Popular Trading Strategy Is So Risky

[Vikturneer]

This time last year I considered getting into options without much knowledge and decided to have a consultation with a trade analyst, and it was incredibly insightful. One year down the road, I truly cannot stress enough how helpful experts in this field are!

[ChristopherAbelman]

I prefer investing in close-end funds that pay monthly dividends. The trick is to hold long term and reinvest the monthly dividends plus buy more shares on a monthly basis or when ever you can afford to. This can be easily done because close-end funds are bought and sold on the stock market just like regular stock. That’d be enough to create a portfolio that would pay you between $50k to $70k in dividend income

[JacobReynolds-tv]

One question, please! Is NVIDIA a safe buy to outperform the market this year? I'm tired of these new buys every week, just to make up some assets with a low percentage on my $236k portfolio and try to keep everything around 10%.

[jinzukinoha]

Option isn't dangerous
Lack of knowledge is dangerous.

[hannahschultz]

Successful people don't become that way overnight. What most people see at a glance- wealth, a great career, purpose-is the result of hard work and hustle over time. I pray that anyone who reads this will be successful in life..

[helenoliver]

When the market goes down then it's buying opportunity. If the market goes up then you are making money. If you stay invested and ignore the market's ups and downs, you'll make a lot of money in the long run; however, a severe market correction causes a lot of margin calls and sell-offs, driving the market even lower. currently, I'm up 13% in my diversified portfolio. As crazy as it sounds some still make enormous returns from this seemingly unknown market. gotta be greedy when others are fearful

[carter]

U.S. stock index futures were lower on Thursday as news of another COVID lockdown in China revived concerns about a slowing global economy. My primary concern is how to grow my reserve of $300k which has been sitting duck since forever with zero to no gains, sure I know the risks of short term gains are much greater but if well managed one'd make a killing, am I wrong?

[YTDataAnalyst]

Can't you guys just make a direct video explaining how people can make big gains within a short period? Isn't there a more direct approach to this? Or are these all speculations?

[UlfsaarGotHungry]

This whole video can be summed up into “leverage correlates with risk”

[ignaciorlimon]

I can’t wait for the piece they do on “How Market Makers and Hedge Funds Made Risky Trading the Norm”

[junkerzn]

Well... the only problem with using GameStop as an example is that it is one of those rare internet trades that actually made a ton of money for retail investors, and destroyed a number of large private traders who had been shorting the stock and got squeezed for billions. That particular action was not a pump and dump, it was a "we're going to force a short squeeze and take some large over-leveraged traders to the slaughterhouse", in public, on the internet. And they did it. Twice in fact. And now maybe even a third time.

Robinhood, on the other-hand, is the ultimate stupid-consumer bait. It wasn't promoting trading for the masses... you could already do that on any number of platforms. It was promoting fast, repeated trading by offering 'free' trades. They make money by selling those retail trading streams to large trading houses to sniff and front-run. Death of a thousand cuts. Their platform definitely did not have the best interests of the teeming masses at heart.

If you want pump-and-dumps, shady trading practices, and mass fraud, the crypto-currency and NFT markets take the cake these days. A never ending stream of fakery, fraud, and theft.

-Matt

[louisairvin]

We are already in the big crash, Inflation is a catastrophe. This CPI report is a colossal failure. To bring the housing market to a halt, the FED will have to pull all the stops. The unfortunate issue is that other markets are being decimated.If you want to stay green, you have to rely on a lot of diversification. Currently up 14% and being careful. Still a better deal than leaving it in a savings or checking account yielding 0-1 percent interest.

[rocketpropelled]

Tldr: A bunch of professional gamblers want more rules "to save the common gambler" in their casino so the professional gamblers have less chance of losing money.

[torytripp]

With the way the market is moving, we'll mostly hold for longer than 2030 to realize profit gain, I think a video on "How to profit from the present market" will be more effective, I mean I've heard of people making upto 250K within few months and I'd like to know how.

[vivianbrown]

When some people think of successful stock traders, they think of multimillionaires lounging in a beach town, making trades and relaxing. That reality is rare, and stock trading isn't as easy or lucrative as it might seem from the outside. Despite challenges, some people elect to stock trade as a part-time job, or they take on stock trading as their full-time gig. If you know your stuff and follow a strategy, you can make money over time through stock trades by adopting the signal of a licence broker

[IAMBETTERTHANYYOU]

Very well articulated; I wish I had more time for trial and error, but I'll be 56 in October and I need ideas and advice on what investments to make to set myself up for retirement, especially with the looming inflation and recession; my goal is to have a portfolio of at least $500k at the age of 60.

[ryanocillaslaw]

Options are not risky if you know how to exit your position; got to take profit and have a stop loss!

[youtoobization]

I love how this video only talks about how terrible options are and that you could lose all ur money but never once talks about the exponential gain potential of options. If options were so terrible, then why are they so popular with traders?

[jx]

Regulators don't really care about investors. Only keeping you poor and in the working class. If they did you would not have the PTD rule. That just locked you into a trade for a day so if a trade starts to go against you you can't get out before you lose your profits.

[NickPlaysGamesX]

My advice for investing priority: 1) Real Estate 2) Tech ETFs 3) Company's you believe in long term . Options are no different from gambling in the casino