Wednesday, May 26, 2010

The Reputation of Stock Options

Stock options have a very poor reputation. They are thought to be either the magical lottery tickets that make CEOs even wealthier or as financial dynamite that can wipe out the savings of the little-guy investor in no time.

Blogger Mark Wolfinger believes that stock options are misunderstood. He points to the many ways that options can be used to reduce the riskiness of investments. Wolfinger has devoted much effort to educating people about the smart ways to use options.

Perhaps a different approach would have a better chance of success because stock options are likely to continue to be viewed as the toys of reckless traders. The problem is that there is a steady stream of people who do manage to lose their savings by trading options. They do this by taking wild chances that Wolfinger counsels against, but that is a subtle point in the battle over the reputation of stock options. The fact is that these bad experiences lead directly to the fear of stock options.

I haven't met many people in person who told me that they have traded options, but almost all of them have stopped because they lost too much money. I can only think of one investor who I've met in person who uses stock options and is happy with the results.

My suggestion is for Wolfinger and others involved in this battle to coin some new term to cover the range of option trading strategies that they consider sensible. This way they can use this new term instead of calling themselves options traders and be perceived as reckless.

For this to work they need a good new term, they need to make it well known, and they need to prevent options gamblers from describing themselves with this new term. The last part may be the trickiest. Perhaps some term that would turn off a gambler-type personality would work best ("granny-trading"?).

If a particular approach to option trading were to gain a small amount of respectability, more commentators might be willing to give this approach to investing a full hearing. Personally, I haven't spent much time trying to learn options strategies. I can assess risk reasonably well, but I haven't figured out yet how to use options without getting eaten alive by commissions and trading spreads.

If the new term catches on, it might even make sense for brokerages to offer accounts that permit options trading that is limited to some well-defined safe strategies rather than permitting the taking of wild chances.


  1. Neat idea. Separate strategies for gamblers and risk-reducers.

    You are correct. I feel as if I am banging my head against a wall.


  2. Call it Trading Insurance, and you might get a little farther.

  3. @Mark: SmartOptions is bound to be co-opted by the gamblers. (On a tangent, I shudder every time I hear the word "correction" used to describe any market drop of a certain size, no matter what the cause. Traders love their euphemisms.)