Gamblers Anonymous: Stocks are crack cocaine

Investment Analysis Clubs Macro Economic Trends and Risks
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This reminds me of the day traders in 2000 before the dot-com crash.

https://www.wsj.com/finance/stocks/stock-market-trading-apps-addiction-afecb07a?mod=finance_lead_pos4

More Men Are Addicted to the ‘Crack Cocaine’ of the Stock Market

Gamblers Anonymous meetings are filling up with people hooked on trading and betting. Apps make it as easy as ordering takeout.

By Gunjan Banerji, The Wall Street Journal, Updated Dec. 20, 2024

A new type of addict is showing up at Gamblers Anonymous meetings across the country: investors hooked on the market’s riskiest trades.

At Gamblers Anonymous in the Murray Hill neighborhood of Manhattan, one man called options “the crack cocaine” of the stock market. Another said he faced hundreds of thousands of dollars in trading losses after borrowing from a loan shark to double down on stocks. …

Doctors and counselors say they are seeing more cases of compulsive gambling in financial markets, or an uncontrollable urge to bet. They expect the problem to worsen… Wall Street keeps introducing newer and riskier ways to play the market through stock options or complex exchange-traded products that use borrowed money and compound the risk for investors… [end quote]

Robinhood and other apps make it easy to place bets. Options are the riskiest. The rapid increase in volume is enough to sway the market.

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The stock market is in a late-stage bubble even without the gamblers. With them…well, be careful out there.
Wendy

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Thanks for posting, I’m too cheap to subscribe to the WSJ.

Options just be callin’ me man, they be callin’ me man…I just got to trade 'em.

Uf! Here’s an interesting paper, if you’re a super geek (no shame) - https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4695776

“We have found that trading in derivatives can destabilize the market in the underlying asset. This result is particularly true if the demand for speculative positions in the form of long call options is particularly large. Contrarily, speculative positions in the form of short put options lead to an increase in market stability. Building upon prior research on leverage-based measures of stability, we find that a market may initially be in stable state, but that endogenous market dynamics like hedging flows may lead to instability. Like in a phase transition, the switch from stable to unstable is abrupt; a small variation in market composition or option pricing may lead to a very different outcome.”

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One man’s opinion, that’s about what the article is worth.

Fantastic source.

Every online stock broker makes trading easy. Why call it a bet?

The mathematics of the option market are quite similar to casino games, with sellers playing the part of the house and buyers playing the gamblers. The big difference is that casinos games are truly zero sum games while stock price volatility adds complexity to option trading. BTW, shorting stocks is much more dangerous. Does the WSJ write about shnorting shorts?

o o o o o o o o o o o o o o o o o o o o o

It’s been a while since my last Covered Call post. The Covered Call Selector is working just fine, highlighting the best trades in each option chain. What has been developing is the strategy.

The biggest risk is capital loss due to falling stock prices followed by over trading. What is called for is a better understanding of market sentiment, a specialty of day traders and chartist. One early strategy was to split the portfolio in two, long term hold (investing) and option trading (income), to protect long term investments. The downside is that a large part of the portfolio does not benefit from option trading.

I watch TSLA carefully it being my largest position.

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I started buying in late September 2020 when it looked like the EV technology had Crossed the Chasm. From 2021 through 2023 I did some trading to bring down the average cost. I made no trades this year. While the year end run-up was very tempting, I didn’t want to sell any shares. Instead I looked for a covered call strategy. What call option could I sell with minimal risk of being called?

The bull run looked unsustainable. Selling calls at the top of the bull run is great! The market is calling it “a Trump rally.” A knowledgeable analyst credited FSD v. 13 and Optimus’ hand dexterity. Whatever it was, the year end run-up forced Wall St. to engage in vigorous window dressing.

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Look for the top, look for the top, look for the top, which is only recognized after the fact with 20-20 hindsight. The rally looked like breaking on Wednesday the 18th. Might as well risk it with a high enough strike price. With TSLA at around $450 I sold January 17 $510 strike price at $21.60. That’s a 4.8% return in one month if the call expires worthless or 18% if assigned with a good chance of buying back the shares at or below $510.

Happy Trading!

The Captain

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No, that’s not the big difference. Options are also truly a zero-sum game. The big difference is that because many options expire worthless, option sellers have a large advantage over option buyers. Of course, selling options requires more capital to be available (“margin”). It might be compared to someone who plays perfectly efficient blackjack. Over the long term, someone who plays perfectly efficient blackjack will always outperform someone who doesn’t. But the person playing perfectly efficient blackjack must have a sufficient bankroll to make it through the downdrafts. And nobody ever wins over the “house” because the house essentially takes transaction fees. And those happen regardless of win, lose, or draw.

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4.8% return if the call expires worthless.
18% return if the call is assigned.

But that doesn’t cover all the possibilities! What happens if the stock drops to $350?

-19% return if the stock drops to $350.

In theory, to determine if the investment is worthwhile doing, you would calculate the “expected value” taking into account all the possible outcomes. Or at least all the likely outcomes.

I understand that sometimes the underlying stock is already owned at a much lower basis. But that is irrelevant to the decision being taken NOW at the $450 price. Just like “sunk costs” don’t (shouldn’t) affect future decision making, neither should “sunk profits”.

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Nice comparison. And…sometimes Blackjack McGee is playing next to some dipspit splitting queens or hitting a soft 19.

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And, what happens if the stock zooms up to $680? You get your 18% instead of 50%. Quite an opportunity cost, and expensive if you want to reestablish a position in TSLA.

DB2

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I agree that option trading in isolation is “a truly a zero-sum game.” Taking into account the price change of the stock it no longer is a zero sum game: Do the numbers:

Assigned Seller Buyer Game sum
Buy 100 TSLA @ $100 -10,000
Sell call strike $120 @ $5 500 -500 0
Cost -9,500 -500
Sell 100 TSLA @ 120 12,000 -12,000
Tesla goes to $160 0 16,000
Profit./Loss 2,500 3,500 6,000
Opportunity loss 4,000
Expire worthless Seller Buyer
Buy 100 TSLA @ $100 -10,000
Sell call strike $120 @ $5 500 -500 0
Cost -9,500 -500
Sell 100 TSLA @ 120 0 0
Tesla goes to $80 8,000 0
Profit./Loss -1,500 -500 -2,000
Opportunity loss 0

The Captain

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The loss would be the same with or without the call except for the call premium.

There are three possibilities

Stock rises Call worthless
Stock rises Call assigned
Stock falls Call worthless

The Captain

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This is exactly the outcome I’m trying to prevent or at least mitigate by setting a higher strike price at the cost of a lower premium.

This is where chart reading and trading knowhow helps :imp:

The Captain

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For me, you are confusing two DIFFERENT investing philosophies: wealth BUILDING vs INCOME creation.

I have LTBH investments in stocks for building wealth. I have no intention of selling these. And I have an impecunious mindset WRT these funds. Later, these will serve as the basis for a 4% withdrawal.

I am selling options right now, FOR INCOME… RIGHT NOW.
I have designated a small percentage of my net worth to “current income generation”. For frivolous, “luxury” spending.

I’ve paid the costs for several trips. While traveling, I sold options and easily covered hotel room, gas, incidentals, etc.

I’ve gifted some $ to folks I deem worthy.

Recently, I invited some friends to dinner at Ruth’s Chris. The morning of the event, I sold some Options n made enough to easily cover the costs.

I got a new fridge a couple years ago. I do NOT like it. So, a month ago, I sold some options.
I also want a new induction range. So, a month ago, I sold some Options.
Those new appliances will be delivered in the next couple weeks.

Why am I spending these $ for Non-essentials? Cause selling options is providing the discretionary income, and I don’t have to dip into my permanent wealth funds.

Ie, Cause I can. LOLOL

Options provided the INCOME for these “luxury” expenses.

The LTBH part of my strategy is still “untouched”… And growing.

Do I 'win/gain" on every Option trade? No.
But I am “gaining” more (and more often) than I’m "losing ".
So, far, I’m finding SELLING options to be rewarding.
It’s working for me.

Will it keep working? IDK.
But I do know that I have some travel memories, some dining with friends memories, and I’ll have a new fridge n range.
If I don’t like the fridge or range, I’ll sell some Options n trade em out.

It’s a way different mindset than the impecunious mindset I’ve had most of my life.

For me it’s two different pots of $ and two different goals and mindsets.
I’m not using one or the other… I’m using both.

In addition, I LIKE doing the Options. I like following stocks, I like choosing a strike and expiry. And then doing it again. And again.
For me, doing options is online gaming FOR ADULTS. It’s real world, not fantasy.

:slightly_smiling_face:
ralph

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This is the best course, in my opinion. The trade I’m suggesting is an exception to the rule taken only at very special occasions, at real bubble tops and only on the way down. In this case I’m also counting on year/quarter window dressing. They can’t reverse the window dressing before the end of the quarter.

If TSLA rises to $531, 26%, from Friday’s close by Jan 17 the trade breaks even. An additional 26% from a bubble top is not all that likely.

The Captain

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After 30 years of the “4% rule”, my 4% withdrawal is now down to a 0.3% withdrawal.

Having the S&P 500 grow almost 20-fold over the past 30 years will do that.

intercst

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There are always going to be some. It was day traders, now this is options traders. Some will have a big payday, most won’t.

Funny thing is, casinos are a less-than-zero sum game, because somebody has to pay the house. The stock market is a more-than-zero sum game, because companies pay dividends out to players paid for by corporate America’s profits. (The rest of it is merely trading between players.)

But you can’t learn ‘em up good, so let’em play. Serves them right, I say.

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Casino games are negative sum because the house will always win if the player gambles long enough.

In theory, options are zero sum, But it depends on how you look at it.
Let’s say an owner wrote a covered call that got assigned. The owner still gets to keep the premium, and presumably was happy with the strike price, other he wouldn’t have written the call.

The person on the other side got to buy the stock at a price they also were presumably happy with.

So you could argue that both sides benefited. And typically in trades both sides do benefit, that’s why trades exist.

Did you read the article? It didn’t say that options were bad, it said there is a huge increase in the number of people gambling on stocks, some of whom use options.

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Crypto is also a negative sum game because of the miner’s/gas fees. It is mathematically impossible to remove as much from crypto as has gone in.

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This statement is correct. The payout for winning is less than the odds of beating the house. A bettor playing the roulette wheel documents this statement. There are 36 numbers (1-36) PLUS 0 and 00. Yet the payout on a $1 bet on one number is maybe $35 while the odds of winning are 37:1. That means the average bettor has to pay $37 to get a total return of $35. Which is the reason to avoid casinos, etc.

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Obviously, that’s why casinos exist. Without a profit motive casinos would not exist The stock market has a similar setup, commissions, fees, profit sharing, taxes, and whatnots. But to analyze the games being played you need to separate the incidentals.

The Captain

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That’s why it’s almost impossible to bankrupt a casino. Oh wait…

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Yes, the article is about people. But the substance of the article reminds me of screeds about the evils of alcohol, tobacco, drugs, and gambling,

Trading and gambling are not equivalent. The benefit of trading is based on comparative advantage. If you are better at fishing while I’m better at baking, you’ll trade your excess fish for my excess bread and we both will be better off.

Casino games and lotteries, on the other hand, are designed to profit the house. Each game has a vigorish, the take of the house. Any one gambler can make a fortune but the system is rigged to transfer money from gamblers to the house.

Option trading is neither trading (no comparative advantage) nor has it a set vigorish (discounting fees and commissions). The options themselves are a zero sum game. Another peculiar feature is that the goods traded (stocks) have highly volatile values adding to the uncertainty. Both players, buyers and sellers, can win or lose at the same time.

The Captain