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…(read more)
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Why This Popular Trading Strategy Is So Risky
Trading in financial markets can be highly lucrative, but it is also accompanied by significant risks. One popular strategy that traders often employ is known as “short selling.” While this tactic can potentially yield substantial profits, it also carries a high level of risk.
Short selling involves borrowing shares of a stock from a broker and selling them with the intention of buying them back at a lower price in the future. Traders employing this strategy are essentially betting that the price of a particular stock will decrease. If the price indeed drops as anticipated, the trader can repurchase the borrowed shares at a lower price, return them to the broker, and pocket the difference as profit.
However, there are several reasons why short selling is considered a risky strategy. Firstly, unlike traditional investments, where the potential losses are limited to the amount initially invested, short selling has unlimited downside risk. If a trader’s prediction fails and the stock price rises instead of falling, the potential losses can be significantly greater than the initial investment.
Another risk associated with short selling is the potential for short squeezes. A short squeeze occurs when there is a sudden, unexpected increase in the stock price, forcing short sellers to cover their positions by buying back the shares at a higher price than they sold them for. This surge in buying activity can further drive up the price, resulting in a domino effect that can lead to substantial losses for short sellers.
Furthermore, short sellers are exposed to the risk of margin calls. Margin trading allows traders to borrow funds from a broker to leverage their positions. However, if the stock price rises significantly, brokers may require additional collateral to cover potential losses. If a trader fails to meet these margin requirements, they may be forced to close their position at a loss.
Short selling also carries reputational risks. Critics argue that short sellers can contribute to market downturns by spreading negative information or rumors that can artificially drive down stock prices. This can result in significant losses for long-term investors and undermine market stability.
Regulators have implemented certain restrictions on short selling to mitigate some of these risks. For example, some jurisdictions enforce rules such as uptick or circuit breaker regulations to prevent short sellers from piling on stocks experiencing a rapid decline in price.
In conclusion, short selling can be an attractive strategy for experienced traders seeking to profit from declining stock prices. However, it entails significant risks. Unlimited downside potential, short squeezes, margin calls, and reputational risks are all factors that contribute to the high-risk nature of this strategy. Traders should carefully assess their risk tolerance and employ risk management strategies to protect themselves from potential losses.
lol i’m a retail trader with level 4 options. not easy to get there though.
robinhood doesn’t allow short stock or naked options for retail, but plenty of other brokers do.
Managing money is different from accumulating wealth, and the lack of investment education in schools may explain why people struggle to maintain their financial gains. The examples you provided are relevant, and I personally benefited from the market crisis, as I embrace challenging times while others tend to avoid them. Well, at least my advisor does too, jokingly.
this is such a stupid narrative CNBC is pushing with this. So much Irony in terms of the practices utilized by financial institutions and media
Option trading is the least risky trading strategy lol
I feel its safer to do the credit and debit spreds because the risk is defined, but the lower stages have high risks.
Disingenuous reporting in an attempt to dissuade options trading. CNBC wants you buy what they tell you to buy via their relationships and with their adverstisers.
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..
There are restrictions that could limit one from achieving this so I use a user friendly platform enabling I trade on a cash account for high profitable trades, I make around £ 2k weekly using service using AI technology
Next thing you'll be telling me crypto is dangerous. LOL!
no one tells you how to trade options
Unless you're rich or you know what you're doing, otherwise it's dangerous and can easily burn yourself badly.
How in the world is the ATM 925 call option in there example at the 8:05 mark cheaper than the OTM 1000 call option? These people are getting the basics wrong.
Options are the best investment tool available, period!
it's just the big #market makers covering their shorts before expiration of option contracts. The selling will resume after 20th October unless the #Fed stops pulling out money from the market. A #metaverse gaming that you shouldn't miss is #TheMera #DeFiWarrior #crypto #btc
Implied Volatility and time premium. Options for hedging is low risk…insurance. Option for speculation is risky because of leverage and time erosion.
This is why I stick divendends and buying stock as cheap as possible
Let me worry about losing my money the government did nothing in 2008 to save us.
If you do manage to make it to $500k, don't fall for the ads that say "if you have $500k or more, give us a call." The $500k doesn't give you any more special privilege than someone with $400k. It's just the minimum account size that firm is looking for.
Options trading is not risky at all…..
Lack of edge is….
The fear in their faces is for loosing control over market instead of retail investors are losing money. (Except tiktok traders.)
Thanks so much for this video, I'm nearly 32 trying
to understand the market, I spent about 8 hours just on this video, taking notes and trying to get at least beginners knowledge, and I have to say that out of all the videos I watched, this one helped the most
Master options trading and you are apex predator amongst everybody out there including the big investment banks that sell them to you.
They don’t want to protect retail, they want to rob from retail! Trade as you wish! Just do your own DD and research
Bot active here!! Stay alert
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.
Fake News terrible YouTube channel take it down.
Option is the best way to succeed.
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?
Unsophisticated investors + complex options trading = five alarm dumpster fire
The opening line: a hoarde of investors… correction GAMBLERS.
Rich one year broke the next. Life on options for most
Isn't the Tesla example at 7:35 wrong ?
Damn now I have to buy more AMC
You guys need to grow up and stop YOLOing on SPY puts
When the financial network doesn’t know what it’s talking about…..
……and that RH quote at 10:45 is purely woke propaganda. But that last bit about WSB is true —- and it needs more coverage. Those “HODLrs” are pushing the biggest pump and dump in modern history, and they’re crushing millions of hopeful fools still to this day.
Options trading is not risky. Seling ‘naked’ with high delta when you are not seasoned IS risky. If you don’t know what ‘naked’ or ‘delta’… that definitely means you.
I’ve studied all the Greeks AND the black-scholes algorithm, and I still just do iron condors or covered calls. options require more management than regular stocks, and (I would argue) more discipline.
Keep it simple people.
Mr. Suq Madiq has helped me grow my account from $1 to $100,000 in 1 week with option. He said option provided leverage that was needed to exponentially grow my account. You should contact Mr. Suq Madiq to help grow your account from $1 to 100,000 in 1 week.
Options are amazing!!!
Option trading has both good and bad points. One major plus, the option exchanges are lit. Meaning no Dark Pool for major players to hide their trades. Regular stock trading is about 40% Dark Pool.
options are not risky. become educated on options themselves, market analysis (fundamental or TA), and market psychology. it takes time and hard work, but not many are dedicated anyways. they’re risky bc all of the typical traders and investors trade off of emotion subconsciously. you know how many professional options traders have been profiting off of everyone’s fear in this bear market? it’s absurd, but only the 10% know how to consistently win. key word consistently. anyone can put on a winning trade. glad this bear market is weeding out all the fake traders who were never dedicated anyways. greed goes a long way.
i think you can close your position before expiration day and profit the same or more than level 3?