When I decided to take the path of trading options for a living, I was not taken seriously by the vast majority. I have heard many times that trading options is simply gambling, mostly by people who have no idea how to trade- BUT, nonetheless this can still be very discouraging when you are starting out. While you can most definitely gamble with options trading, I am here to explain how knowledgeable traders are definitely not gambling. After reading this article, it is my goal that you leave more confident in the process of learning to trade options as a source of income.
Is Option Trading Gambling?
The short answer is no, BUT there are definitely ways of trading options that I would consider gambling. If you are interested in learning what not to do, I have written a whole article explaining two strategies you should stay away from if you want the odds to be in your favor.
The Three Key Differences
I honestly do not know much about trading stocks, but I do know a thing or two about trading options. I want to note that these differences I am about to share come from my personal experience with trading and only apply with option contracts- stocks are much different.
1. Odds are in your favor
When you go to the casino, what would you say your odds were of winning? Truthfully, you can not really trust a google search for this information, but I believe we can all agree that the odds are in favor of the house or else there is no way casinos could operate.
Now, what would you say your odds were of beating the financial market? May seem hard to calculate. Luckily- your brokerage calculates this for you. With every trade you put on, a metric, POP, will tell you your odds of winning.
POP- Percent chance of profitability
Different trades will give you a different POP, so to the point-
When you trade options, you choose your odds.
2. You have more control of your risk
Honestly, I have never been to a casino so feel free to debunk me here. BUT- I imagine you have very little control of your risk. Your risk essentially is just how much money you put in, and you have very little control of your odds. To the point- You can not pay more money for better odds.
With options, you most definitely have more control of your risk. Risk management is a whole game for successful trading. We have all heard “high risk, high reward.” This decision to have higher risk is completely in the hands of the trader. I could write a whole article about risk management, but for the sake of keeping things short-
When you trade options,
you can pay more for better odds- lower risk, lower reward.
you can pay less for worse odds- higher risk, higher reward.
I would say this is standard, but as I mentioned, there is a lot more to risk management so please do your homework.
3. You can hedge your positions
This difference goes hand and hand with managing risk. Hedging may seem confusing if you are new to the finance world, but it is quite simple. If you think that stock XYZ is going to go up, you would sell a put. But to reduce the risk in the case that stock XYZ goes down, you could sell a call at the same time. Essentially here, you are betting on both the stock going up, and the stock going down. When used correctly, hedging reduces your exposure to risk by limiting your losses if you are wrong, while not significantly reducing your profit potential if you are right.
Hedging your position while gambling would look like “I think team ABC is going to win so I am going to put X amount of $’s on them, but I will also put X amount of $’s on the opposing team, XYZ in case they win. So yes, technically you can hedge here, but not in a way that is going to give you room for much profit in the case you are right.
When you trade options,
you can hedge your positions to limit your losses in the case you are wrong, while still having significant profit potential in the case you are right.
Why Trading Options Is Not Gambling
1. The odds are in your favor
2. You are in control of your risk
3. You can hedge your position
I hope after reading this article, you feel more confident that there is in fact a smart way to trade that is not just getting lucky. I post articles weekly, so if you are interested in more content like this please subscribe below so we can get rich together!