WASHINGTON – Over on another website, I tried to answer the following question, apparently sent in by a precocious (or greedy) high school student interested in trading stock options as a way to impress college admissions officers. And presumably for fun and profit.
Would being a successful options trader in high school help you get into a good college?
Wrong question. Unless, of course, you’re already a math genius or have already become addicted to gambling.
But I essentially told the student that planning to become a neophyte options trader at a tender age would likely not impress most college admissions officers, “unless you’re looking to enter economics or business school. Or, maybe major in math and statistics. This isn’t likely to gain you traction anywhere else.”
Here’s an expanded version of my answer, which I think might be useful for anyone with notions of getting into the options trading game.
What the heck are options? Specifically, stock options?
Stock options, simply defined, are essentially bets on the direction a stock might take over a limited period of time. Each option covers the potential move of 100 shares of common stock over a defined period of time, usually a few weeks or a few months.
You can buy options at a fraction of the price of the equivalent number of shares of the underlying common stock. That’s why they’re attractive. But, unlike a common stock, an option will expire worthless on x-date if things don’t go the way you think. Stocks don’t generally “expire.” Unless, of course they go bankrupt. But that’s for another column.
But back to the rest of my response to this precocious (or greedy) student…
At this point in your life, why are you considering trading in options? An average American high-school student doesn’t have anywhere near the amount of money he or she needs to get started in this chancy game. Even worse, you’re likely to lose plenty of money in the game. Early and often.
You’re better off doing the wealth thing the slow way That means by accumulating small amounts of shares in relatively boring blue-chip companies (or maybe tech darlings) and adding to these positions as your finances allow. Brokerage firms like Schwab are even enabling regularly investing smaller investors to buy “stock slices” of hot but expensive tech stocks a little bit at a time. Unless, of course, you can shell out $3,000.00 or thereabouts for a single share of Amazon. (Trading symbol: AMZN), for example.
Bottom line, however: You are better off learning about stocks first and doing the options thing later.
Problem is, like gambling in Las Vegas, options do offer you the chance to make easy money. But with about the same odds of making that easy money that you have playing the slots.
Know who you’re playing against
In the stock market, you’re working against highly sophisticated, algorithmically driven high-speed computer programs that will mow you and others down in a nanosecond when the magic signal sounds. Just like the Vegas gambling halls are highly rigged in favor of the house, so, to is the game of options trading.
Unless you have an excellent grasp of the market of stocks itself before you start playing, you’re at a disadvantage as a neophyte options trader. That assumes, of course, that you can’t just hop on some hedge fund’s high-speed computers and have them execute trades for you.
In all seriousness, I’d forget this idea, for now. Experience will eventually tell you when … or if … to get into options trading. And there are some conservative ways to use options. But you have to own a decent portfolio of stocks first in order to take advantage of strategies like writing covered calls.
Writing covered calls
And do keep in mind, there are conservative options transactions available. One is writing covered calls, as I just noted. That’s where you short a call against your own 100 share stock position. Check out how this works online via Investopedia and other sources.
How do I know all this stuff? I was once worked as a stockbroker myself for several years and put through transactions in stocks and options routinely for my customers. Even today, from 9:30 a.m. through 4 p.m. ET on weekdays, you’ll often find me sitting in front of a 27-inch computer scheme watching a series of trading screens for my own accounts. And trying to beat traders with higher-speed computers than I have. Which I sometimes do.
So, yes, I actually still do this stuff, and (usually) win more often than I lose. And yes, even the best and brightest lose money sometimes, so don’t let anyone tell you otherwise.
But I rarely do options, except for occasional covered call strategies. The problem for most small investors these days is that you have to own at least 100 shares of a decent stock to write covered calls against them. And 200 and more shares are even better. Problem is, stock prices are very high these days in dollar terms, making it more and more difficult to own enough shares of a popular, profitable company to execute this kind of strategy. I’ve read that the SEC is considering new regulations allowing options to be sold against a lower number of shares. But, given the speed of Federal government deliberations, I’m not counting on this kind of adjustment anytime soon.
Final thoughts on the (sometimes) Wonderful World of Options
In the end, just remember one thing. You’re trading against a phalanx of high-speed, algorithmically driven trading machines. So you can rarely find a winning position that they haven’t already figured out. That’s why I play a straight investing game by looking at stocks the machines rarely look for. Boring, but effective.
In the end, there’s a lot to learn about trading and investing, whether you’re talking stocks, bonds, options, or those dreaded futures that will hand you your own head on a platter. So start out small and modest. Learn along the way. But don’t begin with options.
Unless you’re the next Einstein. Or a hyper-smart mathematical prodigy who loves probability and doing complex equations instead of going out on Saturday night.
– Headline image: NASA astronauts Scott Altman and Mike Massimino of the STS-125 mission visit the New York Stock Exchange to support the release of an IMAX film entitled, “Hubble 3D.” NASA US government photograph, in the public domain. Image obtained via an article on stock options, via Wikipedia.