How Amateurs Lost Billions on Options

07/08/22 • 32 min

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During the day-trading craze that erupted amid the Covid-19 pandemic’s lockdowns, market professionals repeatedly warned a new flock of Reddit-reading, Robinhood-using retail investors that equity options were risky, and that bold bets in that market could end badly. It turns out their caution was spot on.

Day-traders managed to lose more than $1 billion during the bull market, with the bill climbing to $5 billion when the cost of doing business with market-makers is factored in, according to Svetlana Bryzgalova, Anna Pavlova and Taisiya Sikorskaya of the London Business School. The three researchers joined the “What Goes Up” podcast to talk about the findings of their study, and discuss what retail traders need to know about options trading.

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Previous Episode

Cash Is Not Trash

It’s a common motto among investors: Cash is trash. But Oksana Aronov, head of market strategy, alternative fixed income at J.P. Morgan Asset Management, says not so fast.

“I’ve been hearing about investors losing money sitting in cash, and that cash is trash for as long as I’ve been in this industry,” she said on this week’s episode of “What Goes Up.” “But the reality is that if you have been in cash for the last five years, you’ve essentially outperformed the Bloomberg Barclays aggregate index year to date, over one year, three years, and, depending on the day, yes, even five years.”

Aronov says that risks are currently skewed to the downside, and that she and her team prefer to have a lot of liquidity in their portfolio because “it serves as a free option, essentially, on any asset class in the world.” Opportunities will come by, perhaps in the coming months. “For us, this is still a capital-preservation part of the cycle, although I think we’re closer to the end of it than we were a couple months ago.”

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Next Episode

New Risk: Self-Fulfilling Recession Calls

Mark Zandi, who has been an economist for more than three decades, says he’s never seen so many people convinced that a recession is imminent. And while he believes the US economy can still avoid an economic downturn, sentiment is so poor that it poses its own risks.
Zandi, the chief economist at Moody’s Analytics, joined the “What Goes Up” podcast to discuss his outlook after government data this week showed the highest level of inflation in almost 41 years. “I talk to CEOs, CFOs, investors, friends, family—to the person, they think we're going into recession. I've never seen anything like it,” Zandi says. “When sentiment is so fragile, it’s not going to take a whole lot to push us in.”

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What Goes Up - How Amateurs Lost Billions on Options

Transcript

Speaker 100:00:14.400

Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg and humbled Onna Higher Across Acid reporter with Bloomberg. And this week on the show, Well, do you remember during the COVID lockdowns, when the meme stocks like game Stop and a m C started going crazy and social media was filled with posts about amateur tradings who are making a killing trading their options. Well, like many t