The Secret Between Trading Options And Gambling?

| July 17, 2012 | 0 Comments

secret between trading options anf gamblingIn Chicago, home to the CBOE, many people do know who an option trader is.  But that’s clearly not the case in other parts of the country.

There are many traders and investors alike that believe an option trader is no different than a poker player.

Let me say that some of you will immediately see the correlation.

Many professional traders, especially option traders, are in fact also poker players.

Aaron Brown, a quant from the prominent hedge fund AQR, wrote a book on this called “The Poker Face of Wall Street”.  And one of my favorite traders, Ed Thorp, penned the poker book “Beat the Dealer” before writing “Beat the Market”.

Truthfully, telling someone that I’m essentially a professional online poker player makes sense. 

This is because many people already think that trading is as good as gambling.

And it certainly can be.

Ok, I know what you’re thinking… why trade options?

Simply, this is only half of the story.  The fact is, there are subtle differences between options trading and gambling.

Although some traders would probably be better off going to a roulette wheel and laying all their trading capital down on black or red.  That is the best thing to do if you don’t have a probability edge.

But herein lies the difference between my job and the tables.

Gambling is laying down your money where you don’t have an advantage or, as Dickson Watts writes in “Speculation as a Fine Art”, where there is no calculation.

Another way of looking at the difference is that of luck versus skill.

Winning at roulette is just a matter of luck. 

While winning at poker, at least consistently, is a matter of skill.   

Those who are simply lucky may find a winning trade, but most of them won’t last long in the market because they are gambling.

On the other hand, traders that have skill may lose a given trade but still have the probability of success on their side in the long run.

So, what’s the difference?

Part of that skill is trade structure.   And the other part is risk management.

For instance, leveraged put selling, requires relatively little skill, yet it will make money most of the time if done properly.

Risk-managed volatility selling, on the other hand, does require skill and won’t be subjected to potential ruin in the same way.  In other words, again, if done properly, it will make a trader unlimited amounts of money.

Bottom line…

So the next time someone asks me what an options trader does, I’ll tell them it’s similar to gambling with one large caveat.

The difference is that gambling involves no skill, unlike poker gambling.  That form of gambling takes years of concentration and perfection.

Safe Trading,

Marcus Haberman

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Category: Options Trading Basics

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.