How Is Options Different From Gambling?

By Motley Fool Staff Markets Fool.com

Options are one of the least understood aspects of investing for everyday investors. In this clip from the Industry Focus podcast, options expert JP Bennett answers a listener question and explains how trading options is very different, and much more reliably profitable, than gambling.

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A full transcript follows the video.

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This video was recorded on March 24, 2017.

Dylan Lewis: Jako asks, "Explain if/how options trading is different from gambling, please."

JP Bennett: Great question. It's definitely something that, I believe it's kind of like a misnomer with options. People tend to think these are instruments that people who are in the markets, who are in Wall Street, or whatever, can use to create a lot of wealth, but anybody else who tries to use them is going to get hosed, or, even people who use them on Wall Street get into a lot of trouble. But it basically is just like with investing. With stocks, I believe the biggest advantage that individual investors have is their time horizon. You can try to day trade, but you give up a lot of that advantage, and really, it's going to hurt you over the long run. It's the same thing with options. You can create strategies, or basically try and trade, in a way that is very similar to gambling. If you get a home run in one of your first couple strategies, you're really set, but otherwise you're going to end up with no money. Or, you can do what we do. In Options, we target consistent winners, basically creating a diversified portfolio of options strategies to generate income and long-term capital gains, and do it in a much safer, low-risk manner. Basically, we do that in terms of how we structure our trades, what types of trades we favor, the strike prices we use, expiration dates, how much we pay. If you basically go -- I'm just looking at it right now -- our updated accuracy list for all of our close positions, we have co-advisors Jeff Fischer and Jim Gillies. For Jeff Fischer, he has a 94.6% success rate in terms of all of those strategies finish generating positive returns. For Jim Gillies, it's 87.9%. So, more often than not, we're making money on an options strategy. If you know a casino where you can go to where you can gamble and achieve those success rates, please fill me in, because I would love to go there and make a lot of money and retire early.

Lewis: That's an excellent point. The house has a much steeper advantage when it comes to gambling.

Bennett: I would also add -- what you said just triggered it for me -- basically, with options, you can set it up so that you are betting against the house or that you are the house. We like to set it up so that we are the house, so we are winning more than we're losing.

Lewis: It's always better to be the house.

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