FT Options trading

FYI:
MASSACHUSETTS REGULATORS TO FILE COMPLAINT AGAINST ROBINHOOD-WSJ

“Massachusetts securities regulators are expected to file a complaint Wednesday against the wildly popular trading platform operated by Robinhood Financial LLC, alleging the company aggressively marketed to inexperienced investors and failed to implement controls to protect them.”

“What you described is gambling”, really?

Not all options strategies involve the wild plays you see on WSB. Selling puts on stocks you want to own is actually a much more effective way of owning stocks than just buying them outright.

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Yes, it also more effective to lose a lot of money if you don’t understand convexity and second order effects.

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I disagree that it’s a platform for beginners, It should be beginner friendly, but it’s not “for beginners”

There are safe ways to use options, the problem is there are also dangerous ways to use them and it’s difficult to implement the safe ones with making more risky ones possible.

An example of a safe one is selling calls against a stock you already own. If the stock goes up you are obliged to sell (but at a profit as the stock has gone up), if it goes down the call expires worthless and you made income off the premium.

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Selling a put obliges you to buy the stock at a particular price. It will only lose you a lot of money if the stock has dropped below your strike price and you are obliged to buy at a price higher than the current price.

if you are happy to hold the stock at your strike price because you think it will come back up this is not a massive problem. and you still got the premium for selling the put.

The main problem with the way some brokers implement options is that they settle for cash rather than actually exercising the option, which does make it more akin to gambling as it locks in your losses without giving you the opportunity to just hold the stock and wait

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Leverage is the difference. You have limited upside(the premium you get paid), but massive downside vs. what you get if the position goes against you.
Say, you’re bullish MSFT, sell 1Y ATM put @ 12% for £1,000,000 notional. You get paid £120k, but you can lose much more than that, theoretically as much as £1M.

Sure, people who know the risks are more than welcome to underwrite options, but beginners should not be nudged into this.

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You wouldn’t lose £1M, you would lose £880K (£1M less the premium) - hence the reason selling puts is a more cost effective way of owning a stock you are confident in. If you had bought the stock outright for £1M you would have lost £1M.

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That’s right, but you’d still lose less that if you just bought the shares and held them all the way to the bottom because you make money on the premium.

You’re correct in saying the leverage is the problem because you can get into a position where you are obliged to buy $1M worth of shares when you never had $1M in the first place

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Yes, but that is exactly difference. People are rarely willing to put £800k on a single stock, but are willing to do a more “cost effective” trade where they get paid £120k and worry about downside later(it won’t happen anyway, right ?)

Things are even worst when you are short call options, where the loss can be truly unlimited.

To be honest I don’t have a strong opinion on whether or not Freetrade should include stuff like this. I’m OK with their current position that it’s a platform for long term investing and Options don’t fit their vision. but if they did decide to include some form of options I’d be OK with that as well

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Short call options is OK if you already own the stocks that you might be obliged to sell, then you are covered if they go up. If they don’t go up it’s a way of generating income

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Agree. They need to consider carefully against their mission, user base, the cost of adding options, etc…

I think there have been some extreme cases in the US with RH, where sadly one novice user has taken his life when he was a negative 600k balance in his account. (although it was deemed later to be just an inconsistent view of his account)

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You need to know what you are doing with options, I reckon a large number of those will end up wiping out their accounts

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I do believe Freetrade should be careful if they ever introduced options to the platform - considering this new lawsuit. I would personally like the see them introduced but it could prove to be a mine field.

Thinking from a competitive viewpoint with Trade Republic offering derivatives - it may be the case that consumers demand the service. Freetrade may have to seriously consider it for EU expansion? Watch this space!

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I think we can all agree that there is a lot of education required to fully understand the ins/outs & risk/rewards with options.

I think it would be an excellent addition but with users having to first complete an assessment to validate that they actually understand what they are getting into and secondly perhaps naked calls (unlimited downside) are not allowed to avoid brutal losses?

Here in the US there is an options specific trading platform that is just ramping up called Gatsby (currently raising on seedinvest). The demand for options is booming and FT should get a slice of this…

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I agree

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