Why Stock Options Investing Is Not Gambling (Read the Arguments)

Updated on July 19, 2018
Daniel Mollat profile image

Daniel is a retired business executive who now devotes most of his free time to trading stocks and stock options in the stock market.

In a gathering of friends there was this conversation between Charlie and Pete:

“Hey Pete, you live in Las Vegas, do you go to casinos and gamble often?”

“No, not at all. I never go to casinos to gamble. I don’t need to, I’m already gambling in the largest casino in the world”.

“Yeah? Which casino is that?”

“The stock market”

“That’s not gambling, Pete. That’s investing.”

“Charlie, for you it’s investing, for me it’s gambling. You see, I’m a stock speculator and as such, I bet on the direction a stock price will go. In my situation, this is just plain and simple gambling. I buy stocks for the sole purpose of generating a profit if/when the stock price goes up in value, hopefully within a short period of time. I do not hold stocks for a long time. I bet that the stock I choose will go up fairly quickly and I will then dispose of it for a profit. If the stock does not go in the direction I predicted or even stays flat or its price starts to drop in a given period I will rid myself of the stock and take a loss if I must.”

“Pete, that’s just like betting on a casino gambling table. Why not just go to one of the casinos in Vegas, since you live there anyhow, and place your bet there? You don’t have to wait days to see the results like you would in buying a stock for speculation. In minutes you know if you’ve won or lost”.

“Totally different Charlie. In a gambling table you are totally betting on chance or entirely dependent on pure luck. You have no data to work with to improve your odds of winning. The odds are fixed in favor of the house.

In the stock market I can do a lot of research on stocks and figure out which ones I think will go up in price. There are many factors that can guide me in deciding which stock to bet on and which ones to avoid. I can look at a company’s financial reports, balance sheets, past market performance, dividend records, ownership composition, market trends, market price highs and lows, plus almost an endless amount of statistics on a particular company. None of these data are available on a casino table”

Stock Market Gambling Shirt
Stock Market Gambling Shirt

“Yes, that is correct Pete, but there is still no guarantee that with all the data you have on hand you will always correctly find the right stock to bet on. As you know there are hundreds of high paid stock analysts and experts who do nothing but study the dozens of statistics to do the same thing you are trying to do. Yet most of them fail in selecting the right stock all the time.

There is, in fact, a group of people who call themselves ‘stock pickers’ who make this their livelihood. They call their websites ‘advisory services’ and the service they offer is picking stocks for investors and speculators. You may want to look at an article on this subject.

Charlie continues: “If I were you I would not bet on stocks if I’m a speculator. I’d bet on options instead. Just like stocks, ETFs, and Indexes, you can use options to gamble or play it safe in the stock market. Here is where you could make real money gambling in the stock market. Of course, you don't always win gambling in options, but more often than not, and if you're savvy enough, your winnings could be much bigger than your losing bets.

In my case, I choose the safer approach by using options to complement my stock positions. Options enable me to increase my rates of return on stock ownership, reduce risk and increase my dividend payouts.

But if you really wish to speculate or gamble in the stock market, options trading would be the way to go”.

“Look at this scenario, Pete. Let’s say on June 29 you strongly feel that Advance Micro Devices Inc. (AMD) is poised for a nice uptick from what you have gleaned in your statistical research.

The stock is currently priced at $12.84 and you decide to buy 800 shares for a total investment (or gambling bet) of $10,272. Assuming you were correct in your prediction and nearly a month later, on July 25th, the stock price has risen to $14.08. You decide to sell, close your position and pocket a net profit of $992. This is a very attractive return of 9.7 percent on your original investment (or bet) in just a short period of time.”

“But Pete, look at what you would have achieved if you did options instead of the stock. On June 29 you could have bought the AMD September 14 call option (expiring in the third week of September) at a price of $1.05. On July 25th when the stock was priced at $14.08, the AMD September 14 call was priced at $1.45. The AMD September call option has appreciated 38 percent, from $1.05 to $1.45, while AMD stock went up by only 9.7 percent in the same time period.

157% Versus 2.7% Profit?

“Here is a more dramatic example.

On June 28 JPMorgan Chase (JPM) stock was priced at $89.16. On the same date, the JPM July 92 call option was priced at $0.47. The stock was on a strong upward trend since June 23 and looked well on its way toward higher prices.

So let’s assume you entered the stock on June 28 and bought at $89.16. Let’s assume further that I’m a speculator (gambler) like you but I’m an options gambler and bought the JPM July 92 call at 47 cents. Two days later, on June 30th the stock price had risen to $91.58 making a 2.7% price advance. On the same date of June 30, my call option price rose to an astounding $1.21 for a percentage increase of 257%! In this situation, I would have liquidated my option position and pocketed a 157% profit on my initial bet while your stock was only 2.7% up on your initial bet. And this happened in only two days time.”

The numbers are quite amazing!!

“See the big advantage of trading options instead of stocks? There is really a lot more to this comparison than what I’m presenting to you. I just wanted you to see what options can do for you whether you are a speculator or investor like me.

“Okay, Charlie. You have shown me how stock options can be a better vehicle to use for speculating in the stock market. How do you use options in your stock investment?”

“I use the covered option selling strategy to complement my stock investments. Rather than go into a long explanation of how options work wonders for me it is better for you to start learning options by reading everything on this subject.

You will see how stock options are a remarkable tool for increasing returns on stock ownership as well as learn how to use options by itself as an investment instrument. The numbers are quite amazing.

You may want to take a look at one of the books I've read that is primarily directed to beginners. Its entitled "Options Trading: Strategy Guide for Beginners"

Note:

Any and all information pertaining to trading stocks and options including examples using actual securities and price data are strictly for illustrative and educational purposes only and should not be construed as complete, precise or current. The writer is not a stockbroker or financial advisor and as such does not endorse, recommend or solicit to buy or sell securities. Consult the appropriate professional advisor for more complete and current information.

Questions & Answers

  • Who should be using the strategy of selling options?

    Definitely not those looking to make short term profits in the stock and options market. The program of selling options is intended for those who seek a safe, low risk investment vehicle to grow their capital steadily over a period of time. It is not a 'get-rich-quick' method of earning profits in the stock market.

© 2018 Daniel Mollat

Comments

    0 of 8192 characters used
    Post Comment

    • Glenn Stok profile image

      Glenn Stok 

      5 months ago from Long Island, NY

      I like your style of teaching by actually writing a story. This is a good introduction for someone who doesn’t know anything about options.

      I like to take advantage of the premium in options by selling instead of buying, but that’s getting more technical and I know this was meant to be a preliminary intro to the wonderful world of options. Well done.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, toughnickel.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://toughnickel.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)