These three options investing mistakes cost investors $5 billion last year and most beginner options investors don’t even know what happened. The solution to each and how to invest in options. Watch Next! My 5 Favorite Options Strategies! https://youtu.be/owZNEuYL_N0
Regular investors lost more than $5 billion on options investing during the pandemic, and a lot of that was hidden in fees you didn’t even see. In this video, I’ll reveal that $5 billion options investing mistake and three others investors make. I’ll show you how to invest in options the right way and share an option strategy I use to get stocks at a discount!
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According to the Options Clearing Council, retail investors traded more than 23 million call options in one week last year and total daily options volume more than doubled from just a few years earlier. Researchers from the London School of Business studied options investments by retail investors between November 2019 to June 2021 and found the group lost $1.14 billion on total trades and an additional $4.13 billion in hidden trading costs!
Worse yet is that the S&P 500 surged 40% during this period meaning not only did investors lose money trading options but lost the chance to make a LOT of money just investing in stocks!
The first mistake options investors make, and this was a big one for losses, was buying out of the money calls days or even hours before expiration. What happened is options investors were buying these call options on hot meme stocks like GameStop. Those call options give the investor a chance to lock-in a certain price for the shares until a certain date, the expiration date of those options. Those shorter-term options can rise and fall even faster and if the stock prices isn’t close to the locked-in price then they can trade for just pennies. Investors got dollar signs in their eyes. The bet thousands of dollars on options contracts expiring within days that the share price would jump…and when it didn’t, those option contracts expired worthless.
The biggest mistake by options investors, the one that caused over $4 billion in losses, was not understanding bid-ask spreads. The bid and ask prices for a stock are the prices someone is currently offering to buy the stock, the bid price, and someone is offering to sell the stock, the ask price. That difference in bid and ask prices is magnified in options investing. Here we see the June call options on GameStop with a difference of $1.70 between what someone is willing to buy and the price another investor wants to pay. That’s nearly 20% of the option value! So what happens is options investors not understanding this, maybe just placing a market order to buy those options, would end up paying a huge premium on the option’s value. You could be immediately out 20% on your investment.
Watch the video for solutions to both these options investing mistakes and the third mistake, the biggest one yet!
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Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through debt payoff strategies, investing and ways to save more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.