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Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advi

Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.

encoderer 12y ago
It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
- deleted 12y ago
  [deleted]
- chollida1 12y ago
  http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(
  - encoderer 12y ago
    Limiting profitability to increase probability of success is one of the principles of professional trading. Take for example, every single spread that's bought and sold. The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound. I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%. So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market. * At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position. By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%. Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost-basis-reduction-to-increase-the-probability-of-profit-of-buying-stock/ http://probabilitycapitalgroup.com/market-studies/using-cost... And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free. I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls. Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit. You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance. Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.
- enraged_camel 12y ago
  >> Buying stock is a 50/50 bet. The price can either go up or down. Just because there are two possibilities does not mean they are equally distributed.
  - encoderer 12y ago
    Go argue with Random Walk and Efficient Market theory. It's not a notion I just made up.
    - pbreit 12y ago
      Neither disputes that stocks go up over time (ie, movements are not equally distributed). They are more concerned with the difficulty of timing and beating the market.
    - enraged_camel 12y ago
      I'm not saying those theories are wrong. My suspicion however is that you took that statement out of context and grossly misinterpreted it, and are using that misinterpretation as the basis for the terrible advice you're giving.
      - encoderer 12y ago
        If you can articulate exactly why it's "terrible advice" i'll eat my hat. Here's my advice: If you invest the time to learn how to use derivatives, you can be far more profitable than investing only in stocks (whether companies or index funds). And I've made a lot of money, not by making gambles but by trading a large number of small positions over a long timeline, selling option premium and earnings a fantastic return. It's a fact that retail investors have under performed as a class. And I didn't invent any of the strategies i'm using, nor did TastyTrade (though they do a great job advocating for and researching them). And I absolutely am delighted to spread the word, even if it means debating people like yourself. Your motivation is, I suppose, an innate certainty in your own correctness. It doesn't seem to matter to you that we're debating a subject that I clearly have a lot more passion about and experience with. And your message to anybody reading is "I can't tell you exactly why this is all bad advice, I'm just sure that it is." I'm certain that options or futures trading isn't for everybody. But you're certain that it's not right for anybody and you and others here have taken a "shout him down" approach that is very un-HN imho...
- mrfusion 12y ago
  I've had this idea before. Any advice on what strike price you'd sell the calls at?
  - encoderer 12y ago
    Check out TastyTrade.com, watch some of the videos. I have a few rules: 1. Only trade very liquid underlyings. Only 30-40 stocks make the list, and only 10-15 are companies. 2. I don't always sell covered calls, only when IV Rank is high enough to tip the edge in my favor 3. When IV is high, you can set your strike price further out. 4. It's good to go to the 1 Standard Deviation strike, so in your trading platform look for the strike that's around 68% OTM. Truthfully, though, I don't do covered calls all that much. Because they tie up a lot of buying power because you have to buy the underlying stock. They work best if you already are committed to holding long term, and if you write them in you IRA, which will prevent any tax implications should your short strike be reached and your stock called away. When that happens, by the way, I just deploy the capital elsewhere, it's not tragic.
    - mrfusion 12y ago
      I'd love to hear some more ideas. I was going to email you but I didn't see an email listed? Would you drop me an email?
- tome 12y ago
  When you say "basis" are you talking about tax basis? Are you suggesting there is some positive tax implication to trading options? Or are you talking about something else?
- thedufer 12y ago
  Retail investors on average underperform the market, yes. Retail investors who only invest in index funds tie with the market (pretty much by definition) and those who think they can beat it drag the average down. You're generalizing over a group that has no homogeneity. > You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. Its like you're not reading any of the advice here. Its just as stupid to invest in an individual stock as to buy a call spread. If you're doing either, the bet you're making is "I know more about this subject than tens of thousands of professionals who have studied it for 100 hours per week for the last decade". Out of context, that's an obviously stupid bet except in very very rare circumstances†. So what about it being the stock market suddenly turns it around? Index funds, on the other hand, definitionally track the market. Something which the professionals you think you can beat can't even do on average. This is the strategy that is being pushed, not buying a huge number of shares of a single risky company. †Those circumstances are, in stock trading, largely illegal to act on.
  - encoderer 12y ago
    Ok, forget TSLA: Why is it less risky to buy 100 shares of SPY (at around the same $20k as TSLA) vs a $300 call spread on SPY? How can it POSSIBLY be riskier to spend $300 vs $20,000? I'm sorry man, you don't get it, but you're sure that you do, and you're so sure that you can't be wrong that you dismiss things you clearly don't really understand. You disagree that retail investors should use options? Make an argument aside from "it doesn't work" because I have years of returns -- and you can watch HUNDREDS of hours of studies on TastyTrade and others -- that makes a far better case than your abject dismissal. I write about option strategies because I'm certain that it's good for individual investors to see serious, experienced people talk about it. I know, I know, you're certain I can't possibly be right (for some reason) and I guess you think I'm just making it all up out of some 4chan like desire to ruin people. Whatever, man. The only traffic to this page now is you and me and other existing commenters. What's crazy is, TastyTrade, it's a startup! They took VC money and have a dozen data scientists producing meaningful research -- the same stuff hedge funds and prop firms do -- and they release it all publicly. They have a market theory, and they've built fantastic free trading software (first Think Or Swim, now Dough.com) to give investors tools to implement their strategies. These are the good guys, empowering people to not get screwed by some shitty store front financial advisor. They had a 1/2 billion dollar exit with ThinkOrSwim and they give everything TastyTrade does away for free. There's an app you can subscribe to if you want to, but there's no obligation, it's real altruism. Now, feel free to have the last word. If you're up to it, I'd love your take on the question I asked somebody else: Wouldn't you agree that it would be a bad idea for a retail investor to invest in OTM options hoping the stock price will move in their direction? It's an awful strategy, with a low probability of success. Almost certainly those options you bought will expire worthless. So why on earth are you advocating so strongly against taking the OTHER SIDE of that trade? Here's a good answer: If you just do not have any time to invest, if you can't put in 15 mins each morning, then fine. But you must feel pretty strongly, so please, explain why you wouldn't want somebody to make that trade.

Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.

encoderer 12y ago

It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.

deleted 12y ago
[deleted]
chollida1 12y ago
http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(
- encoderer 12y ago
  Limiting profitability to increase probability of success is one of the principles of professional trading. Take for example, every single spread that's bought and sold. The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound. I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%. So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market. * At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position. By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%. Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost-basis-reduction-to-increase-the-probability-of-profit-of-buying-stock/ http://probabilitycapitalgroup.com/market-studies/using-cost... And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free. I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls. Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit. You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance. Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.
enraged_camel 12y ago
>> Buying stock is a 50/50 bet. The price can either go up or down. Just because there are two possibilities does not mean they are equally distributed.
- encoderer 12y ago
  Go argue with Random Walk and Efficient Market theory. It's not a notion I just made up.
  - pbreit 12y ago
    Neither disputes that stocks go up over time (ie, movements are not equally distributed). They are more concerned with the difficulty of timing and beating the market.
  - enraged_camel 12y ago
    I'm not saying those theories are wrong. My suspicion however is that you took that statement out of context and grossly misinterpreted it, and are using that misinterpretation as the basis for the terrible advice you're giving.
    - encoderer 12y ago
      If you can articulate exactly why it's "terrible advice" i'll eat my hat. Here's my advice: If you invest the time to learn how to use derivatives, you can be far more profitable than investing only in stocks (whether companies or index funds). And I've made a lot of money, not by making gambles but by trading a large number of small positions over a long timeline, selling option premium and earnings a fantastic return. It's a fact that retail investors have under performed as a class. And I didn't invent any of the strategies i'm using, nor did TastyTrade (though they do a great job advocating for and researching them). And I absolutely am delighted to spread the word, even if it means debating people like yourself. Your motivation is, I suppose, an innate certainty in your own correctness. It doesn't seem to matter to you that we're debating a subject that I clearly have a lot more passion about and experience with. And your message to anybody reading is "I can't tell you exactly why this is all bad advice, I'm just sure that it is." I'm certain that options or futures trading isn't for everybody. But you're certain that it's not right for anybody and you and others here have taken a "shout him down" approach that is very un-HN imho...
mrfusion 12y ago
I've had this idea before. Any advice on what strike price you'd sell the calls at?
- encoderer 12y ago
  Check out TastyTrade.com, watch some of the videos. I have a few rules: 1. Only trade very liquid underlyings. Only 30-40 stocks make the list, and only 10-15 are companies. 2. I don't always sell covered calls, only when IV Rank is high enough to tip the edge in my favor 3. When IV is high, you can set your strike price further out. 4. It's good to go to the 1 Standard Deviation strike, so in your trading platform look for the strike that's around 68% OTM. Truthfully, though, I don't do covered calls all that much. Because they tie up a lot of buying power because you have to buy the underlying stock. They work best if you already are committed to holding long term, and if you write them in you IRA, which will prevent any tax implications should your short strike be reached and your stock called away. When that happens, by the way, I just deploy the capital elsewhere, it's not tragic.
  - mrfusion 12y ago
    I'd love to hear some more ideas. I was going to email you but I didn't see an email listed? Would you drop me an email?
tome 12y ago
When you say "basis" are you talking about tax basis? Are you suggesting there is some positive tax implication to trading options? Or are you talking about something else?
thedufer 12y ago
Retail investors on average underperform the market, yes. Retail investors who only invest in index funds tie with the market (pretty much by definition) and those who think they can beat it drag the average down. You're generalizing over a group that has no homogeneity. > You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. Its like you're not reading any of the advice here. Its just as stupid to invest in an individual stock as to buy a call spread. If you're doing either, the bet you're making is "I know more about this subject than tens of thousands of professionals who have studied it for 100 hours per week for the last decade". Out of context, that's an obviously stupid bet except in very very rare circumstances†. So what about it being the stock market suddenly turns it around? Index funds, on the other hand, definitionally track the market. Something which the professionals you think you can beat can't even do on average. This is the strategy that is being pushed, not buying a huge number of shares of a single risky company. †Those circumstances are, in stock trading, largely illegal to act on.
- encoderer 12y ago
  Ok, forget TSLA: Why is it less risky to buy 100 shares of SPY (at around the same $20k as TSLA) vs a $300 call spread on SPY? How can it POSSIBLY be riskier to spend $300 vs $20,000? I'm sorry man, you don't get it, but you're sure that you do, and you're so sure that you can't be wrong that you dismiss things you clearly don't really understand. You disagree that retail investors should use options? Make an argument aside from "it doesn't work" because I have years of returns -- and you can watch HUNDREDS of hours of studies on TastyTrade and others -- that makes a far better case than your abject dismissal. I write about option strategies because I'm certain that it's good for individual investors to see serious, experienced people talk about it. I know, I know, you're certain I can't possibly be right (for some reason) and I guess you think I'm just making it all up out of some 4chan like desire to ruin people. Whatever, man. The only traffic to this page now is you and me and other existing commenters. What's crazy is, TastyTrade, it's a startup! They took VC money and have a dozen data scientists producing meaningful research -- the same stuff hedge funds and prop firms do -- and they release it all publicly. They have a market theory, and they've built fantastic free trading software (first Think Or Swim, now Dough.com) to give investors tools to implement their strategies. These are the good guys, empowering people to not get screwed by some shitty store front financial advisor. They had a 1/2 billion dollar exit with ThinkOrSwim and they give everything TastyTrade does away for free. There's an app you can subscribe to if you want to, but there's no obligation, it's real altruism. Now, feel free to have the last word. If you're up to it, I'd love your take on the question I asked somebody else: Wouldn't you agree that it would be a bad idea for a retail investor to invest in OTM options hoping the stock price will move in their direction? It's an awful strategy, with a low probability of success. Almost certainly those options you bought will expire worthless. So why on earth are you advocating so strongly against taking the OTHER SIDE of that trade? Here's a good answer: If you just do not have any time to invest, if you can't put in 15 mins each morning, then fine. But you must feel pretty strongly, so please, explain why you wouldn't want somebody to make that trade.