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stinkypants

Do professional traders make their living by taking money from novice traders?

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Russell Stultz says, in The Only Options Trading Book You'll Ever Need, "Professional traders make their living by taking money from "novice" traders. ... It's the amateur traders who feed the professional traders. And until they are educated about market dynamics, chart analysis, and statistical probabilities, they will continue to feed the professionals. Professionals need and rely on the amateurs."

Is this true?

 

 

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Experience is important in any area in life. You need to go through years of training and practicing to become proficient and professional. Trading is no different.

Professional traders don't rely on novice traders to make money. They rely on their experience, skills and knowledge. But experience gives professionals a better chance to succeed. Novice traders will make many mistakes as they learn and gain experience. This is exactly why we recommend starting with paper trading as you start your journey, and then start small. Prove yourself that you can make money with 10k account before increasing it to 50-100k. This way your mistakes will be less costly.

The problem is that most novice traders give up during their first year of trading. Instead of learning from their mistakes and improve, they just give up. 

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2 hours ago, stinkypants said:

 

Russell Stultz says, in The Only Options Trading Book You'll Ever Need, "Professional traders make their living by taking money from "novice" traders. ... It's the amateur traders who feed the professional traders. And until they are educated about market dynamics, chart analysis, and statistical probabilities, they will continue to feed the professionals. Professionals need and rely on the amateurs."

Is this true?

 

 

It's probably only literally true in day-trading boards/forums/chat rooms/groups, wherein the expert pulls the trigger a few seconds earlier than he announces it, and then proceeds to unload his position to his followers 10 seconds later....and then tells them to exit (into the random market).   😕

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7 hours ago, stinkypants said:

 

Russell Stultz says, in The Only Options Trading Book You'll Ever Need, "Professional traders make their living by taking money from "novice" traders. ... It's the amateur traders who feed the professional traders. And until they are educated about market dynamics, chart analysis, and statistical probabilities, they will continue to feed the professionals. Professionals need and rely on the amateurs."

Is this true?

 

 

This is true only in the sense that the professionals (or part of them) manage the markets as market makers and so forth. These do make a living from all of us and good luck to them. The rest of the statement is meant to sell you snake oil advice.

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I'll try to be less vague. I have very little knowledge about options and who's in the market for them. Do you imagine that the people who buy and sell the options you sell and buy typically have less skill or knowledge than you, and they wouldn't be doing so if they knew better? Or, do they have different but still reasonable goals?

Thank you.

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When I do a trade, I have no idea who is on the other side of the trade. It could be another professional, it could be a novice trader, or it could be a market maker. As you mentioned they all might have different goals.

Here is one example. When I sell a covered call, I am thrilled when the stock rallies far above the strike price. It means I will earn my desired profit. Better than that — if the big rally comes soon, I will be able to exit the trade with perhaps 90% of my cash objective. It may be true that the person who bought my call scored a big win (if the trade was not hedged), but that’s not my loss. In fact, it was my additional gain (in the scenario presented).

There are many traders and options gurus who advocate selling options only. They claim that you cannot make money with options buying. We do it for years with our pre earnings straddle buying strategy. Does it mean that they as a group lose money? Not necessarily. Again, they might have different goals and different strategies. 

Where does this leave you? Pick your trades carefully and make sure they make sense to you. Consider proper hedges with your options trades, and let the other folks worry about their own profit/loss ratios. You just have to worry about yours.

 

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The simple truth is that you need to work hard and invest in your professional development in order to succeed. This is true in any area, and trading is no exception. If you give up after one week, there is no chance for you to be successful.

What is common between trading and weight loss?

“I’ll do anything to lose weight (except diet and exercise)” "I will do anything to outperform the market (except study and practice discipline)"

People want to make 10%/month in 10 minutes/week work. Just doesn't work that way.

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I appreciate the prodding but I have no problem with working hard. The responses I've received here, which I'm grateful for, suggest that much of making money in options is just a reliance on less-skilled investors to take advantage of.

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37 minutes ago, stinkypants said:

I appreciate the prodding but I have no problem with working hard. 

And yet you cancelled after less than a week..
 

37 minutes ago, stinkypants said:

The responses I've received here, which I'm grateful for, suggest that much of making money in options is just a reliance on less-skilled investors to take advantage of.

If this was your impression, I suggest you re read the responses. This is definitely NOT what people tried to tell you. The statement is correct to market makers only, and they make their living from ALL traders, novice and professional. And the guy you quoted is not even a trader. 

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2 minutes ago, Noah Katz said:

Seems to me that the real question, at least I understood it, is this: Is the options market in essence a zero sum game like a casino, where the winners' winnings are the losers' losings?

No it's not a zero sum game. I believe my example with covered calls demonstrated it pretty clearly. Here is more insights from other professionals:

 

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Thanks for the links, Kim.

 

Seems to me that the reasons given why it's not zero sum are too narrow in either the time or scope considered.

 

If it's not, then overall wealth is being created, and to my admittedly limited knowledge no one has claimed that for options trading.

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IMHO, even if it were a zero-sum game *overall*, it absolutely is not the case that a newb is getting taken advantage of on any particular trade.  I'm sure others can come up with better examples, but off the top of my head....  Let's say somebody owned a put he had bought as a hedge (say, SPX Jun18 '20 2700), and he was perfectly happy with his purchase and with his continued ownership, but he doesn't need the hedge any longer (we don't need to know Why). And let's say he's one of 25,000 owners of the exact same put (so there're 24,999 other back-stories behind why they own that particular put).  And then somebody, perhaps a new options trader, decides to sell a bull put credit spread because he's bullish; so, for example, he sells 2725 and buys 2700.  And coincidentally, at the exact same time, the seller sells to one market maker, and the buyer buys from a different market maker (and neither mm is being "taken advantage of", as they're watching their greeks quite closely).  So, did the newbie get taken advantage of with his purchase of the 2700 put?  Nope.

@stinkypants

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Yes, this is just one example. What can be an opening trade for you can be a closing trade for someone else. What might be a hedge for you might be a speculation for someone else. What might be a standalone trade for you might be part of a more complex trade for someone else. Different traders have different goals and use different strategies.

And the truth is that it should not really matter to you. As I mentioned, what should matter to us is our P/L, not other people's P/L. The "professional traders take my money" excuse is used by many traders to justify their failures. If you learn, work hard and invest in your professional development, you will be able to beat many "professional" traders.

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2 hours ago, TooEffingOld said:

 

IMHO, even if it were a zero-sum game *overall*, it absolutely is not the case that a newb is getting taken advantage of on any particular trade...

 

No, of course not.

 

I'm just thinking of all the money I've lost buying calls and puts that expired worthless.

 

No one's fault but my own, but seems like money went directly from my pocket to the sellers of those calls and puts, which supports (but not proves) the zero sum thesis.

 

 

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1 minute ago, Noah Katz said:

 

No, of course not.

 

I'm just thinking of all the money I've lost buying calls and puts that expired worthless.

 

No one's fault but my own, but seems like money went directly from my pocket to the sellers of those calls and puts, which supports (but not proves) the zero sum thesis.

 

 

Again, there is zero evidence that sellers of those puts were professional traders. And they might sell you those calls as part of covered calls trade. 

And if one of trades gained 100% due to big stock movement, there is no evidence that the seller has lost money - again, it could be part of a multi leg trade.

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I read that market makers on the NYSE are given special privileges, but on the NASDAQ they are not. Does anyone know why they bother getting involved in profitable but sub-optimal trades (such as on the opposite side of SteadyOptions trades) when one would expect they have the sophistication to do what Kim and company are doing here?

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37 minutes ago, Kim said:

Again, there is zero evidence that sellers of those puts were professional traders.

 

I was addressing whether it's a zero-sum game, not whether it's professionals vs. novices.

 

Though if the former is true, it would be hard not to conclude that the latter is.

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21 minutes ago, stinkypants said:

I read that market makers on the NYSE are given special privileges, but on the NASDAQ they are not. Does anyone know why they bother getting involved in profitable but sub-optimal trades (such as on the opposite side of SteadyOptions trades) when one would expect they have the sophistication to do what Kim and company are doing here?

Don't forget that market makers also buy and sell stock positions as they fill options orders on the open market.   If somebody buys or sells a huge block of options contracts, market makers will fill those orders but also protect themselves by hedging.

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Market makers make money in a completely different way. They don't need to implement strategies that we implement here, or any other strategies that traders implement. It's not their job. Their job is to fill orders, and take advantage on the bid/ask spreads - this is how they make money.

So if your question was "Do market makers Make Their Living By Taking Money From Novice Traders?" - the answer would be yes, but not only from novice traders, from ALL traders.

We have hundreds of traders in our community who started as complete novices and became so proficient that in many cases they beat our official fills and get better overall performance. They are not professional traders - they are experienced traders who invested their time and energy in learning and gaining skills and experience. They don't care if options trading is a zero sum game, and they don't care who is on the other side of their trades. They beat many professionals, and they definitely don't believe that professionals are there to take their money. 

But of course it takes time and experience - like any other area in life.

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