Have you ever thought of buying a put or call option like gambling?

What is the difference between investing and gambling? Is investing in the stock market like gambling? Is investing like gambling? Is the stock market like the casino? Today we answer all of these. The data clearly shows that gambling is a no-win venture, and not at all comparable to investing. The data also shows that the major areas of investment - a diversified stock market portfolio. Investing and gambling are very different. When investing you are adding funds to the capital market that then get used by entrepreneurs to create more value. You are rewarded when they are successful, but can experience a loss if they are not. Either way you are funding the attempt to add value to society.

I hear professional traders use the term 'bet' when talking about options, and even stocks sometimes. My stock buddies sometimes also say 'bet' when they talk about taking a short position. I believe that if you do careful study and homework on a stock, and believe in the long term prospects of the company, that's not gambling, that's a risk-adjusted choice that the stock has more potential than your money sitting in the bank getting no interest and slowly depreciating by (OK, very low right now) inflation. Or, if you already have a portfolio, that you like a stock enough to invest more, or all over again, or that you like one stock over another. How about options? Are options best left to professionals or can the average Joe individual investor actually make money on options? Are options a risky venture, sort of like Vegas at the keyboard? Or are they lower risk? Well, that depends on your knowledge base.

Jun 24, 2017 what is the difference between investing and gambling? Is investing in the stock market like gambling? Is investing like gambling? Is the stock market like the casino? Today we answer all of these. Dec 12, 2017 'The difference between investing and gambling or speculating is taking calculated versus uncalculated risks,' says Greg Woodard, managing director of portfolio strategies at Manning & Napier, an.

When Options are Like Gambling

A lot of people like gambling. Just go to your nearest Casino to find out how much people love to throw their money away! Why not just buy a put or a call from the comfort of your living room; at least you have 50/50 odds! Well, sort of. At your on-line broker's site, you don't get music, or a free drink, or the exciting sounds and lights, and no Cirque du Soleil either! Hmmm... It's not sounding so fun.

Options are like gambling when:

*You don't know the stock very well

*You purchase an option on a volatile stock or hard to value one

* You have no clear short or long thesis

*You don't understand the delta (how much the option moves relative to the underlying stock) or the theta (amount of time decay) of the option. Interpretation: you may not understand that the option is a leveraged investment and therefore the % gain or loss goes up or down like crazy when the stock moves; also an option loses value over time.

Scared yet? No problem--roll the dice!!! If the above sounds like you-be not lazy at home on the keyboard-fly to Vegas, Atlantic City or your nearby gambling town-you will have lots more fun. Seriously, there's no harm in buying an option if the above sounds like you, just realize it's gambling, not investing. And don't go whole hog-just spend what you want to lose.

As an example, I bought an option on Linked In (LNKD) before the quarterly report conference call, to 'play the quarter' and I won! I had an over 100% 'win' overnight! I had used the website, but knew nothing about the company. Pretty much most of the above applied to me. Even though it was a good bet, now I wish I just had the stock, or exercised the option. Of course, you know what they say about hind sight. I got lucky, pure and simple.

An opposite example is when I bought a put on Tesla (NASDAQ:TSLA); I mean, really, a P/E of infinity, a 100 Price/Book a -180% ROE, with a 16 B market cap; super over-valued, right? Not really; never underestimate a cult momentum stock in a bull market! I lost everything I gained on the LNKD call and more.

Options When You do the Homework

As another example, I bought two call options in American Tower (NYSE:AMT) after researching the company and liking the stock post-analysis. I bought the Jan 14 $82.50 calls for $3.75 (now worth $0.85 for a -77% loss) and the Oct 13 $85.00 calls for $1.63 (now worth $0.11 for a 93% loss) both options now have zero intrinsic value.

The stock went from $74.40 on June 19 to $70.22 today (-5.6% loss). So you can see how time and leverage work against your option position, especially with OTM (out of the money) calls, which have less or no intrinsic value. Intrinsic value is the amount of the option price that holds its value, while the extrinsic part decays over time. ITM (in the money) options have more intrinsic value as they get deeper ITM. I could have bought deeper in the money call options, but they are a lot more expensive, and I didn't.

Would you rather risk $375 + $163 = $538 (one option each) and control 200 shares and risk losing it all or buy 200 shares outright and risk whatever amount you think the stock may decline? In this case, I believe I would have been better off buying the stock and just losing 5.6% ($833), since it looks like the stock will not get to $85.00 by October, but, you never know! Other folks say I lost, or will lose $538 rather than $833, so I'm ahead, but I really believe in the stock, so I think it will go up again.

The real issue with the logic in this last sentence is that I never planned to buy 200 shares! As I usually leg into stocks (buy them incrementally) I would have owned 50 shares and lost $209 compared to the nearer dated option that lost $163. Even though I would have lost more on the stock, I would still rather have the stock than the option, as long as I'm convinced in the long term story of it, because at expiration, the option has zero value. Once lost, the option premium (price of the option) becomes a sunk cost, never to return; the stock has potential to return to its original value, and thus has a value.

But wait! You say-isn't that gambling too-I mean you lost right? To me, not really, it was a calculated risk; I did the best I could analyzing the stock, picking the option, and the unexpected happened-one analyst wrote a bad report on the stock and it went down. My point is that if I had spent the capital on the stock, rather than the option, I would have the same thesis today as I did then, but I'd have the $163 sunk in the stock (albeit at a lower value) that has some value rather than the option which will have no value if it expires worthless in October (we'll see).

The Trickiness of Options

The difficulty with options is that you have to get the timing AND the direction right, and it's tough enough just to get the direction right! Stocks may not reflect their true underlying value for many months, and by that time, the option has typically expired.

For most individual investors, therefore, my belief is that they should not 'invest' using options. It's too much work, and you really have to know what you are doing to make money. Just buy the stock for companies you really believe in.

When Options are Not Like Gambling

Options can be used for all sorts of interesting ideas and strategies, including hedging (a form of insurance for when stocks go down), as stock replacement, for extra income on steady stocks (covered calls), for income on stocks you want to own (cash secured puts), and complex strategies that attempt to eliminate some or all of the time decay of options (spreads and more). The problem with all of these strategies is that nothing is for free-either you have to accept option price decay over time, your upside gain is limited or your downside risk is not limited, or worse-both. In general, use the 10/10 rule for options (and I would modify that to lucky 7/7!!): have no more than 7% of your capital in options, and only use options 7% of the time. This will help to limit risk exposure.

Options are not like gambling when you have a situation that is pretty much the opposite of when it is like gambling:

*You know the stock well and have done your research and homework, including the technicals

*You understand the volatility of the underlying stock

* You have a clear long or short thesis or flat thesis and you know exactly why you are entering the trade

*You have an exit strategy for the trade if it does not go your way

*You understand the delta (how much the option moves relative to the underlying stock) and the theta (amount of time decay) of the option, and the resultant intrinsic and extrinsic value and have chosen the option strike price according to your risk tolerance and comfort level

*For complex trades (spreads, etc.) you have modeled the profit/loss

By the way, most options brokers will give you a 'fake account' with fake money in it to learn all about options. This is a super way to learn about trading options (I recommend doing this for a full 5 months first!) so you don't lose a lot of real money.

Conclusion

Buying/selling options is not recommended unless you are a pro, or have read a few books on options, spent a few months paper trading, and have done your homework both on the underlying stock and the option. The average Joe individual investor loses money on options over time (the house wins, in this case the market makers). If, however, you want to do some armchair gambling, and you have an options account or approval for options and money to blow, and you really enjoy it, go for it!

Gambling Vs Investing Reddit Personal Finance

Investing in the stock market carries inherent risks. Just like gambling, it involves the risking of capital in the hope of future financial gains. Both involve speculating on an outcome that can’t be guaranteed – however, there are also some key differences to bear in mind. Let’s take a look at the similarities and differences between gambling and investing.

The Similarities

1. Falling back on a safe option

Both gambling and investing offer the chance to fall back on a safe option. For gamblers, this might be playing on slot games that have a high payback rate – though offer less than you might stand to win at a high-risk slot. In blackjack, there are certain approaches to the game – and ways of budgeting – which can make a big difference to the house edge you’re up against, and how much you walk away with.

For example, the Martingale means you double your previous stake for every losing bet you make – so if you eventually win a hand you’ll have adequately compensated for your losses. We’d recommend putting these to the test when playing American blackjack before taking the table for real. Who knows, you might even prefer the experience, as so many gamblers do.

In investing, you can also choose to take a punt on tried-and-tested shares that have been rising in value incrementally over months – as opposed to throwing all your eggs into the same basket and investing in a start-up.

2. Picking the right moment to strike

It’s not always about having the nerve to take big decisions – it’s about knowing precisely when to make them, too. In gambling, your chance of success rests on how aware you are that you’re onto a winner or loser, and taking your chances to up the stakes or cut your losses. In investing, it’s very clear – you simply have to buy or sell at the right time. In both cases, this is a very narrow window of opportunity, and makes all the difference to ultimate success or failure.

3. Diversification

In gambling and investing, it’s wise to avoid ‘putting all your eggs in one basket’ and betting on multiple outcomes so you’re not too committed to one result which might not come off. Most investors tend to spread their money far and wide, dipping their toes into as many markets and industries as possible to achieve an overall gain.

4. Identifying patterns of behaviour

In sports betting, people gamble on the success of a player or team. Before making their bet they can take time to understandthe team or sportsperson’s form, so they’re making an educated guess at whether they’re more or less likely to win or lose. In investing, it’s much the same. An investor will study an individual’s shares meticulously – this is critical for effective decision-making.

5. Calculating risk

Gambling Vs Investing Reddit Sites

Weighing up risk and reward is the essence of both gambling and investing. The greater the risk, the greater the chance of rewards – but also the more likely it’ll result in failure. That ability to make tough (but not reckless) calls is crucial to long-term success in either field.

The Differences

1. Duration of the process

Investing is a life-long activity – or at least one you need to commit to for many years to enjoy success, as it gives you the chance to take advantage of the general rise of the stock market. However, gambling is essentially short term – taking place over the course of a single evening.

2. The economic cycle

Expansion, peak, contraction and trough are the four distinct phases of any economic cycle. Investors adjust their strategy accordingly depending on the stage of the given company or market. However, in gambling there’s no long-term process – everything hinges on the spin of a wheel or the revelation of a hand. It’s completely unrelated to any event that comes before or after.

3. The house always wins

Perhaps the biggest difference between investing and gambling is the concept of ‘the house always wins’. In investing, you’re betting on the course of the global economy. There are no forces working against you, it’s simply about whether you’re able to predict the rises and falls of companies and industries. In gambling, the casino is there to prevent you from winning. The house edge may vary between games, but ultimately it always wins – otherwise casinos wouldn’t exist.

4. Cutting your losses

In investing, there are a few things investors can do to stop their losses. If their stock falls, they can sell it off. However, if a gambler finds themselves on a downward curve, the chances are they’re going to lose everything.

5. Outside influences

Having said that, you could see investing as a whole lot more unpredictable – as it’s subject to outside influences. For example, after the attacks of 9/11 in 2001, stocks fell to a three-year low. However, the odds in gambling never change, which means they’re by some measures less volatile than investing.

Summary

Investing and gambling have two very different goals and it is these goals that separate them. There are similarities between the two, but fundamentally they are different from each other. Gambling carries much more risk than investing and serves to boost the profits of the casino owner or the player.

Investing, on the other hand, arguably provides much more benefit to society. Of course, owners and investors still stand to make profit, but through their actions, local, national and worldwide economies can prosper.