Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Gambling is typically defined as risking something of value on an uncertain event. Although common forms of gambling include lottery games, blackjack, or sports betting, the line between gambling and investing can be less distinct. For example, binary options are unlike standard options, as they involve an all-or-nothing payoff that makes them more akin to gambling.
It’s important to know that there are some important differences between options trading and gambling, however. Understanding the similarities and differences can help you decide whether your options trading behavior is investing or gambling.
Key Points
• Options trading can resemble gambling due to high risks but is legitimate with a solid strategy and risk management.
• Protective collars, involving holding assets and using options, limit losses and reduce risk.
• A well-defined trading strategy may incorporate stock analysis, technical and fundamental indicators, and risk mitigation.
• Social pressure and excitement can blur the line between investing and gambling, leading to irrational decisions.
• Potential outcomes range from significant losses to profits, emphasizing the need for informed and strategic trading.
What Is Options Trading?
Options trading is the trading of contracts that give a purchaser the right — but not always the obligation — to buy or sell a security, like a stock or exchange-traded fund (ETF), at a fixed price within a specific period of time. Since options contracts fluctuate in value, many traders can buy or sell the contracts before expiration for a profit or loss, just like they would trade a stock or bond.
Options are financial derivatives, meaning an option contract’s value is derived from the value of an underlying asset.
There are two main types of options: call and put options. A call option gives the holder (or buyer) the right to buy an underlying asset, and a put option gives the holder the right to sell it. In general, if you think the underlying asset price will go up, you would buy a call option. But if you believe the underlying asset price will go down, you would buy a put option.
Buying a put or call option, in of itself, is a long strategy. However, options traders may also sell options or use advanced combinations of buying and selling options to pursue certain outcomes. There are many strategies for trading options, whether you anticipate rising, falling, or neutral market trends. Options can be a way to hedge risk or increase leverage for a given investment.
Recommended: Options Trading 101: An Introduction to Stock Options
Weekly Options
Most options contracts expire on the third Friday of each month. However, many underlying securities also have options that expire weekly. These options are referred to as weekly options. Weekly options often have lower liquidity and higher volatility, since there is less time to smooth out the ups and downs of stock movement. This short timeframe makes weekly options more speculative since small price movements can have an outsized impact on your premium.
Finally, user-friendly options trading is here.*
Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.
*Check out the OCC Options Disclosure Document.
Is Options Trading Gambling?
There are many risks in playing the market, so investors should be cautious with their investments and have a risk mitigation plan in place before making any type of stock or option trade. Although options trading is a legitimate investment activity, it involves significant risks that, without a solid strategy, can resemble gambling behavior.
Are Weekly Options Gambling?
Weekly options — along with day trading — are another form of investing in the stock market that shares some characteristics with gambling. If you find yourself rapidly making trades in weekly options without a system in place, trading from social pressure, or because of excitement, you may be gambling rather than investing.
Mitigating Risk When Trading Options
Risk management is one of the most important parts of a solid investment strategy. If you are trading options, it’s crucial to have a plan for handling risk. One way that you can protect your capital and manage risk when trading options is through the use of protective collars.
For example, protective collars involve holding the underlying asset, selling a call option, and buying a protective put against it. This is designed to limit potential losses. This may reduce your risk of loss from larger-than-expected moves, but also can reduce your overall gains.
How to Tell if You Are Investing or Gambling
There are no hard-and-fast rules to determine the difference between investing and gambling, but here are a few questions you can ask yourself to help tell the difference.
Trading Due to Social Pressure
If you find yourself trading options due to social pressure, that can signify that your activities are closer to gambling than investing. It can be common — especially in a bull market — for people to talk about investing with friends and co-workers. If you find that you are trading due to social pressure, especially without a financial plan in place or understanding of your risk tolerance, that may be a sign that you should reconsider trading stocks or options.
Trading Without a System
Having a system in place for how and when you trade is a good indicator that you are investing, rather than gambling. An investment system can include things such as stock analysis, technical and fundamental indicators, and a risk mitigation plan for what to do when a trade moves against you. If you are trading based on hunches and chance, that may indicate that you’re gambling and not investing.
Trading Because It Can Be Exciting
For some, there can be a degree of excitement that comes with making money. If that excitement is the primary reason you’re trading, however, that may be more akin to gambling than actual investing. It can be hard to separate emotions from rational thinking when making stock and option trades, which is another reason to have a trading strategy in place.
Investing With SoFi
There are no hard-and-fast rules that determine whether any particular trading behavior is investing or gambling. Instead, you might think about the reasons why you are investing. If you are trading options for the excitement, to fit in with others, or without a system, that may be a sign that your activity is closer to gambling than actual investing.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
FAQ
What are the reasons to consider trading options?
For experienced investors, there may be many reasons to trade options. One reason can be to hedge an existing investment. Another possible reason is to get additional leverage. With leverage in options trading, you may make (or lose) more money with a smaller investment.
What are the reasons to not trade options?
Options trading does carry some risk for investors, which can be one reason not to participate in the options market. Options are also typically more volatile than their underlying stock, and some options strategies run the risk of losing your entire investment or even putting you in a position where you owe more than you have available. If you are just starting your investment journey, it might be a better idea to get practice by making less risky investments to gain experience.
Can you lose money from options trading?
As with nearly all investments, options trading carries the risk of losing money. Some options trading strategies run the risk of losing 100% of your investment. If you buy a call option and the stock closes at expiration below your strike price, your option will expire worthless. If you sell call options, you can even be in a position of losing a potentially unlimited amount.
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Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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