This week the Wall Street Journal ran an article about some topics near and dear to my heart. Options trading and how the rise of zero day to expiry options (0DTE) are fueling more and more gambling in the stock market.
The article is behind a paywall, but for a quick overview, options originally started as something that traded quarterly. They have various uses but they are essentially used to provide more leverage when trading a product. Instead of buying shares in a company or the stock market in general, you can buy calls, if you want to bet against the company/market, you can buy puts. If you want to read more about options, as always, there is a blog for that.
But for now, we just want to focus on the gambling aspect of options. As I mentioned, options originally were something that traded quarterly, or monthly so you would make a bet based on a big event like earnings or a Fed meeting. Over time, exchanges wanted to make more money off people trading options, and to do so they introduced weekly options. And then mid-week options. Finally, as the article highlights, they have 0DTE options, meaning that every day, they list options on whether the stock market will go up or down. Essentially it allows you to wake up and bet on a coin flip daily.
Now for exchanges (CBOE, CME, etc.) and brokerage companies (Schwab, Fidelity, etc.), this is great because that means you constantly have to keep buying options. And in a world where trading stocks is free, these companies need to make money somehow.
So those dead bodies you see in the back of that last GIF are actually the amateur investors that WSJ is talking about in their article. Getting slaughtered by constantly betting on the stock market day in and day out against professionals.
But blurring the line between gambling and investing is an issue for retail investors. Over and over here, we preach ignoring short-term moves in the stock market and focusing on the long term. Meanwhile, this 0DTE phenomenon is in direct opposition to that and a good way to lose a lot of money.
And in case you were thinking it was a good idea, we have our relentlessly douchey snake oil salesman Pomp out here shilling these short-term options.
In case you haven’t heard my rant about this guy in the past, he was a huge Bitcoin promoter, which is fine. But he partnered and invested in a company called BlockFi and promoted people putting money into the platform for years, claiming that the yield farming scheme was safe and paid so much because it cut out the “greed” of banks.
When FTX collapsed it took down BlockFi and of course Pomp was very sorry that *checks notes* billions of dollars he helped funnel into BlockFi was wiped out.
Because he is incapable of being wrong or admitting guilt, it was the “bad actors” at FTX that screwed you not him. Meanwhile he is either a colossal moron for thinking you could make a lot of money staking crypto or he was lying to you. My guess is both but honestly I don’t care.
Getting back to his comments on 0DTE option trading. Yes, people waste money on the lottery, and I am generally not into regulating people against doing things. So, if you want to gamble on options, go right ahead - BUT - that doesn’t mean I would recommend it.
The real issue I have is with saying that investing is all one big casino. That “wearing a suit & tie and have nice cologne” doesn’t change that fact.
Like we have said this whole article, betting on stocks going up or down on a single day is a bad idea and is pure gambling. However, as we have said basically every week for the last 2 years investing in the stock market over the long run is not gambling.
What’s the Upside?
Gambling and investing are vastly different things and anyone trying to tell you otherwise is a “bad actor”.
Investing for the long run is the most efficient and reliable way to build wealth. Buying into large American companies is only gambling in the sense that you are betting on human ingenuity over the long run.