Answer: Options were created as a way to lose money!
Most amateur traders don’t realize this. Options were created as a way to hedge a position. They were created to act as insurance.
You probably already have several types of insurance: car, home, health, life, etc.
And you probably hate paying the premiums for these don’t you?
But what is worse than paying those premiums?
Having to actually use the insurance.
Because that means something bad has happened.
Options are used in trading the same way you use car insurance: as protection that you pay for, but you never actually want to use.
They were first introduced in the commodities space. Imagine you are a wheat farmer and you need to know what the price of wheat will be when your crop is ready to sell.
Prices fluctuate all the time.
As a farmer you could buy Put options on wheat as a hedge against falling prices. This way even if the price of wheat drops to zero and your crop is worthless, your Put options will make money and make up for the loss.
Or take the example of a toy manufacturer.
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Toys are made of mostly plastic which is made from oil and gasoline. In order for you to know your costs, you need to know what the oil and gasoline will cost in the future.
If they go up too much your toys will cost too much to produce and no one will buy them. So what you do is buy Call options on Oil and Gasoline.
That way even if the prices go up, your options will make money and you can use that money to offset the higher cost of materials.
In both scenarios, you want to lose money on your options!
You only wanted them as insurance. No one ever wants to collect on their insurance, because that means something bad happened.
Market makers and other traders are happy to sell these options because they know the odds are on their side and that the options will most likely expire worthless.
So you see, both sides know that the options will expire. And they are happy with it.
They did so well in the commodity space that stock traders wanted to use them too. So options were then introduced on stocks in the hopes of increasing trading and commissions. Boy did that pay off for the stock exchanges.
But that’s when speculators jumped in and started promoting options as a way to get rich.
And while it is possible to hit a home run with options once in a while, over the long term, buying options is a losing game.
Why?
The odds are against the option buyer.
At SimonSaysOptions.com, we are option sellers.
We find options that we think are going to expire and sell those.
This gives us high probability trades and very nice returns.
You can look at us as either the insurance company or the casino.
We are the insurance company because we sell insurance to folks who want to protect an equity position.
But mostly, we are the casino.
We let option buyers (suckers), make long shot bets that have very little chance of paying off.
The average option we sell has an 80% probability of expiring worthless.
So which would you rather be? The gambler (option buyer) or the house (option seller)?
Because we all know… the house always wins.