Why This Popular Trading Strategy Is So Risky

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In 2021, options activity hit a record high, with nearly 9.9 billion contracts traded. That was more than 32 percent higher than the previous record set in 2020. This increase in volume can be traced back to the meme stock mania as millions of new investors jumped into the stock market during the pandemic. Options trading is a popular strategy among institutional investors to hedge their risk in the markets, but if it’s not executed carefully, it can lead to devastating losses. Watch the video above to learn how options trading took off and why the strategy can be so risky.

“The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous,” Keith Gill told Congress.

Gill — who goes by DeepF——Value on Reddit and Roaring Kitty on YouTube — testified in front of the U.S. House of Representatives’ Committee on Financial Services in February 2021. He became an influential figure online and is credited with helping inspire the epic GameStop short squeeze. Gill would screenshot his investment portfolio, showing his winnings from his GameStop position.

A lot of Gill’s portfolio consisted of what are called options contracts.

Options are an investment strategy that gives a trader the right to buy or sell a security.

“It’s best to think of options as an insurance product,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

Over the past two years, options have become increasingly popular among individual investors using brokerage platforms such as Robinhood.

“Twenty years ago, if you wanted to trade an option, you needed to maybe call up a broker on the phone, you needed to pay a significantly high amount of commission,” Murphy said. “So there’s much easier access to options markets, and the use of options has pretty much just grown alongside of that.”

If used properly, options can be a good way to hedge risk. But they can also be risky.

“Options are the kinds of bets where you can lose everything,” said Joshua Mitts, associate professor of law at Columbia Law School. “Unlike a share of stock, where you might see your portfolio go down by 5[%] or 10% in value, when you buy and sell options, you can lose all of your money.”

“[Options] in and of themselves are not bad tools,” said JJ Kinahan, chief market strategist at TD Ameritrade. “Fire is a wonderful tool. If you don’t know how to use it, it’s going to end poorly.”

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Why This Popular Trading Strategy Is So Risky


SierraCharlie says:

Blah blah blah. They're mad the people are waking up and using the tools they've been using. With that said. LET ME GO DROP SOME MONEY ON PUTS……

Lucy Victoria says:

I have incurred so much losses trading on my own..I trade well on demo. But I think the real market is manipulated. Can anyone help me out or at least tell me what I'm doing wrong

Giordano Allen says:

Great video. We all strive towards financial stability and a better life. It is easy to achieve this through the right investment, by living frugally and budgeting. I’m glad I learnt early in life to work hard for financial freedom

Costco Member says:

I'm a newbie with options and need a tough question answered. Please help..

When I place a market order to "buy to open" a call option, and once it's filled, I then place a "stop loss order" at say 50% of the purchase price paid for the option, can I possibly lose more than that?

If not, then why are people losing their life savings? I don't understand.

Tom Daniels says:

@12:00 that is the most insincere apology , he is so full of caca

Rabbiturtacorn says:

Awh look at the angry institutional wealth folks getting angry that regular people are making money and trashing hedgefunds.

E Man says:

I normally just sell covered calls on investments I have or plan on holding long term for extra income. If it is called I just look for another entry point later on and keep the gains I had plus the selling premium. Most of the time it doesn’t get called and I keep the premium and the asset. Not super risky unless you where just swing trading a company and you sell a covered call with it. Then if it tanks you take a larger loss because you have to buy to close the option and then take the loss on the stock if you really didn’t want to keep it anyway.

Meno Chivo says:

good overall video, HOWEVER, it glosses over a ton of info about options

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Harsh Patel says:

What the hell is this Sonia scam LMAO

Kellan Smith says:

Institutional investors are scared now that retail investors are being exposed to all of these products because they will no longer have their edge. People are free to make their own decisions. AMC and Gamestop shares rose because of the demand. Whether or not that the price is reflecting the “true intrinsic” value is irrelevant. The market price is determined by how much someone is willing to pay, so retail investors stuck it to the man when those institutions shorted the stock. Good on them too, who says investors have to play by the rules. If they get caught with their pants down, then thats the risk they took by shorting the shares.

Sumith Bhat says:

1:17 basically he means if are a hedge fund with inside information then it's a wonderful tool

Thomas Lan says:

I realized that the secret to making a million is making better investment. I always tell myself you don't need that new Car or that vacation just yet and that mindset helps me make more money invest:ng. For example last year I invested 70k in blue chip stocks and crypt0 s (with the help of my advisor of course) and made about 380k, but guess what? I put it back and traded with her again and now I'm rounding up close to a million. Delayed gratification always pays off

Creative ones says:

false you only lose your premium and you cant also hedge your option

Valentina Alaben says:

Thanks so much for this video, I'm nearly 32 trying to understand the market, I spent about 8 hours just on this video, taking notes and trying to get at least beginners knowledge, and I have to say that out of all the videos I watched, this one helped the most. Thanks again

Connor Wills says:

Nice content, Starting early is the best way of getting ahead to build wealth, investing remains a priority. Already making 85% profit from my current investment with a professional broker, Mrs Judith Callen.

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