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- A year of lock-downs, stimulus checks, and colorful trading apps has turned buy-and-hold retail investors into regular users of powerful financial tools.
- Watching daily stock price movements is consuming an inordinate amount of my time and attention.
- How it all ends is yet to be seen, but one thing is certain: retail investors will wrongly be the target of financial institution’s blame.
- Kevin is an active-duty Navy FA-18 pilot who invests in his spare time.
- This is an opinion column. The thoughts expressed are those of the author.
- See more stories on Insider’s business page.
My iPhone screen time is averaging 4 hours and 13 minutes a day. It used to be half an hour. In previous years I reported half a dozen stock trades in 52 weeks. I had 20 trades in the last 5 weeks of 2020 alone.
I have become hooked on easy options trading and am worried not only about what this means for me but about the unforeseeable impacts it will have on the whole of the stock market.
Steal from the rich?
Sitting outside a surgical ward on November 25 and waiting for a knee operation, I downloaded the Robinhood app. In minutes – and with too much ease – I linked my bank account, transferred $400, and was approved for options trading. I had never traded options before, but I quickly bought a single “call” option for Palantir Technologies Inc. stock expiring on New Year’s Eve. 20 minutes later when I surrendered my personal goods for surgery, my investment return was already down $80. My stomach turned.
For the uninitiated, a “call” option gives the buyer of the call contract the right but not the obligation to buy 100 shares of the underlying stock at the “strike” price, on or before an expiration date. For example, imagine that a single share of Ford Motor Company is trading at $12. For a $31 “premium” you can purchase a call option contract with an expiration date of May 28. Owning the contract would give you the right to buy 100 shares of Ford for $13 per share (the “strike” price) on or before May 28. If Ford trades below $13 at market close on May 28, you would lose all $31 of your investment. If Ford trades at or above $13 per share, you will exercise the option. However, you will not recoup all of your initial investment unless Ford closes at or above $13.31 per share, the “break even” price.
The allure of buying call options is that you can harness the power of owning 100 shares of the stock for only $31 in this case. Your worst case loss is only $31, but your potential gain is unlimited. Moreover, you don’t have to wait until the expiration date to exercise the contract. If tomorrow Ford went to $20 per share, you could exercise and gain at least $669. The value would be even higher if the market expects increased volatility in the stock price.
There’s a lot that goes into valuing a call option. Suffice it to say that buying an “out-of-the-money” call option with a short time to expiration is a lot like sitting on a homemade rocket. You are betting on a lot of volatility to happen. Yeah, you might “go to the moon,” to speak in the parlance of Reddit’s WallStreetBets community, but the rocket is much more likely to explode and leave your investment splattered on the launchpad.
I have been investing since 2007 and, despite some initial setbacks, have benefited from the longest bull market in US history. My index and target date funds have performed well. I had never “played” the market. When my finance professor admonished the class that options are “for mitigating risk, not speculating”, I agreed. My Vanguard portfolio shows a steady climb.
Lying at home in bed after the surgery, immobilized with a heavily-iced knee, I opened Robinhood expecting to be wiped out. Yet, the numbers were bright green. I was up 20%. Two days later I watched with rapt attention as the stock blasted skyward. The thin line on my screen jaggedly worked its way upward, hesitated for a second, and sharply started to descend. I quickly sold my contract for $1009, a 200% profit. Confetti rained across the app’s screen. The needle hit the vein. I was hooked.
Easy successes followed. Two days later, I turned $80 into $800 buying call options on Blackberry. Yes, I mean the former mobile phone maker that is surprisingly still in business. I bought options on Micron and Virgin Galactic and made $100 here and $200 there. I hit a wall in mid-December, my original $400 having peaked around $3500.
Desperate for a hit, I started researching obscure Chinese electric vehicle makers, Canadian uranium miners, and gaming accessory manufacturers trying to turn the daily performance of my portfolio from red to green. January turned things around. Nokia suddenly shot through the roof. Thanks, WallStreetBets.
What happens when life goes back to normal?
Even now, I tell myself that “this isn’t me.” To some extent, that is true. I would never have been hooked on volatile trading were it not for a pandemic lockdown. I am also sure this is true for many of the other novice – and much maligned – retail options traders. Lockdown, stimulus payments, and a year of remote graduate school has replaced any semblance of competition in my life.
Previously, I served in the military, teaching other Navy fighter pilots how to win in combat. The ultimate victory was the placement of the lime green gun crosshairs on the enemy’s aircraft. Now, I log into Zoom three times a day. Robinhood is always open in the background, hopefully in a lime green font, indicating that day’s financial gains
The day I wrote this, though, I lost $600 as options expired worthless. That is enough to buy a few weeks’ worth of groceries, pay rent in many parts of the country, or to fund 10% of an annual IRA contribution. And I didn’t flinch. I was simply angry the number was red instead of green. The digits matter less than winning and losing.
This should not be surprising. The ease of access and slick interface provided by Robinhood appeals to generations that grew up on Xbox Live. Lock us in our homes and deposit stimulus checks and we will find a way to turn investing into a game. The quick dopamine hits, however, mask the dangers involved in playing with options and leverage. The sad story of a young trader taking his own life after seeing an artificially large indebtedness highlights these perils.
Yes, this is of course just filling a void created by lockdown, but it may be too late to reverse course once the world opens back up. I fear that a return to working in-person won’t obviate the need to see how Blackberry, AMC, and an obscure diabetes-implant maker’s stocks are moving from 9:30 am to 4 pm. I don’t know if this new army of options traders will finally return to enjoying their weekends, instead of anxiously counting the hours until Monday’s open. More importantly, there’s no telling what will happen to the market if enough of us are able to shake this habit.
One thing is for certain. When the bubble does pop, retail investors trading in small sums are going to be blamed for manipulating the market. This ignores the hedge funds and investment banks who have been addicted to manipulating the market for decades, with much more power behind them. For the market to be “fair”, these potent tools must be made freely accessible by all. For all Robinhood’s flaws, it has succeeded in this.
As investors then, we must be willing to live with the highs and the lows, the good and the bad. The perspective of what is “good” and what is “bad” simply depends on where you trade from: the office or an app.
Kevin Sartain is an active duty Naval Officer and Master of Public Administration candidate at the Harvard Kennedy School of Government. The views expressed in this article are his alone and do not reflect those of the Navy or DoD, nor do they constitute endorsement or repudiation of any corporation.
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