<<<For the bolded part to have occurred, I am going to guess that the funds used for the options had an opportunity cost associated with not purchasing shares. Is that a correct guess?>>.
Any type of losses, actual losses, and opportunity cost losses.
I am not one to say don’t do it. Do use options if you understand how in a systematic program, or to sell calls for income, or whatever works for you. And then also, that once in a decade sort of opportunity or so. Sometimes once every few years anyways, at the most. As such opportunities to go naked long with risk that is appropriate is a rare occurrence.
Mostly, for me, it has been opportunity cost. You get in a short-term mentality, want your money now! Once you make it, you move on to the next and the next and the next, getting cocky all the while.
What you end up doing is paying taxes yes, but you also use a small portion of your money to do these trades, with each such trade not mattering much to the overall scheme of things (as you might imagine, this was never my issue, but is what most people do) and they start using more and more of the more money and more and more option trades, and at some point, it does not work anymore.
So what happens when it does not work anymore? You double or triple down, because now stock prices have fallen, and what a deal they are! They are on sale! And worse, you have now lost money and you want it back. So instead of buying these “on sale” shares, you leverage with options (because you can control the same amount of shares with less money that way). And this accelerates the downfall.
Whereas, instead, had you just systematically bought the best companies in the world, understanding you won’t always make money, sometimes the share prices, as they have gone up, will go inexplicably down, but with patience, if they are great companies, whoooshhhh! Rise again they will, and you will have been systematically buying the stock when everyone else was selling.
End result, with options (naked longs or shorts anyways) you end up losing and holding an expiring ticket, with the equities you are holding an asset with no time expiration.
I am looking at this from the perspective of the guy who lost everything on Celera using margin. Even with this, had he simply systematically bought the best companies in the world 17 years ago, today he would be sitting here as a senior investor, most likely financially independent if he chose to be.
That is a very large opportunity cost.
There is also the smaller such costs even if your correct, like I gave the example with Vertex when I got a nice double out of a 50% share price rise, just missing the big money before my LEAPS expired. Took a few more months, and I would have had the huge money, but the LEAPS were expiring so what could one do.
I had the shares at $13, I could have just kept buying and holding them. Instead I settled for a far lesser, and much riskier return by going long naked LEAPS.
Finally, we are all human. Along the course of time our emotions can start playing havoc with us. Especially those close to the market. When the market goes down, you go down. You anchor on what you had, what was, instead of what can be. And you start to take riskier and stupider decisions to get back what was.
All in all, UNLESS you are in a well thought out, systematic, sophisticated options strategy (Denny as an example has one that he uses for his own purposes) you are going to have large (1) opportunity cost losses, and (2) your bad habits, which have turned you from an investor in companies to a trader in shorter term price swings in equities, will eventually cost you real and actual losses that mere patience cannot make up. The options will be gone, the money will be gone, never coming back, and the MARKET WILL TURN! It will turn. Amazon will still be churning, it will come back, or something else will, but your stock options losses will not.
(3) what happens when you have these losses but yet earlier in the year you had short term capital gains? Well, the taxes are still due! Disaster.
In the end, is it worth all of this when the KISS principle is likely to produce far better returns in the end?
Each to their own.
I find just the bad habits developed, and it does become somewhat like going to Vegas (albeit, your odds are better with us for sure) are the thing that destroys your ability to become a wealthy man in good order.
If you are younger than 34, and thinking age 50 is too far away, and too old! That simply comes from youth. Use age 40 then. Women are still beautiful at either age, the wine is sweet, the ocean water irresistible, and there is nothing better in life than waking up and doing exactly what you want to do! Every day, because you want to do it, and can do it, because you have put enough away that no one can control your life.
Pretty much the gist of it. I do not recall any great losses I made in actual big dollar terms. What I do recall is this syndrome, described above, and it will hit, UNLESS, you are very systematic, sophisticated, and stay within the program. WHICH AGAIN IS INVESTING LONG-TERM. And if you are going to invest long-term anyways, why not do it in the one proven method to achieving wealth.
But my kids (young teenagers now) won’t bother to listen to me either, so for whatever it is worth.