The internet is littered with financial trash posts, ones that can quite literally lead to utter destitution, barring the occasional bonanza that then attracts another wave of lemmings. One such post – replete with WallStreetBets vibes – caught our attention recently, containing such “valuable” pearls of wisdom that it birthed an entire article.
For the benefit of those who might be unaware, WallStreetBets is the name of the Reddit forum that had spawned the meme stock mania of 2021, propelling GameStop, AMC, and a handful of other downtrodden stocks to unimaginable zeniths on the back of successive waves of massive short squeeze. Apart from unleashing a veritable macrocosm of memes, the forum is largely responsible for ushering in the age of retail risk-taking, having spawned catchy slogans such as YOLO (You Only Live Once) or BTFD (Buy the Dip).
This brings us to the crux of the matter. Instagram user notfinancialadvice__ recently shared an anonymous post in which an amateur dabbler in the complex world of equity options – likely inspired by excessive risk-taking on the WallStreetBets forum – considered taking out loans to buy put and call options in a particular stock, banking on booking profit on at least one leg of this leveraged trade to pay off a part of the loans.
First of all, this strategy is known as a straddle and can only work if a stock is particularly volatile. Ideally, you would want at least one leg of this options trade to be deep in the money. Of course, this strategy is not at all riskless, as postulated in the post above. Consider a scenario where the underlying stock does not move during the duration of the trade. In that case, even if one of the options is slightly in the money, the options would still lose their value due to time decay and volatility premium.
Second, in what represents the classic amateurism that so thoroughly populates the WallStreetBets forum and its similar incarnations elsewhere, this trade is supposed to be leveraged, which entails additional interest costs. If the options expire at the max pain point of this trade, you would not only lose almost the entirety of the options’ value but also remain on the hook for the interest and the principal amount of the two loans.
In short: avoid leveraged trades and do not trade options without first acquiring a basic understanding of how they work. Before live trading, consider opening a paper account to get a feel of the market. But most important of all, risk only the amount of money that you are absolutely comfortable losing in its entirety.
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