“So, what do you think of this latest bull run? I’m reading an article in The Wall Street Journal that states the current PE (past 4 qtrs) is an average 22.2 — is that very high? To earn my keep, I’ve been scraping by with investments (very small) in real estate and by trading stocks options.” – David, South Florida entrepreneur

David, if you can make a living over the long run trading stock options, you are a smarter man than I — and most others. By their nature, options involve relatively short-term bets. GOSH, it’s hard to know where anything is headed short-term. (I know it will be warmer in the summer, but next week?) And with options, you’re not investing (where all investors can win), you’re betting (where for each winning dollar there is tax to pay, plus someone’s losing a dollar — plus commissions).

I assume you’re not doing anything crazy (writing naked puts or calls), so if it’s working, hats off to you. But this is a tough way to earn a living.

The market is high here, but with the demographics and psychology at play (“everyone” now knows to put all his or her money in the market, just buy more if it dips), it could just keep going up, with small setbacks, for a very long time. (Or it might not.) I recently tried to sketch what I thought were some of the key overriding positive and negative forces at play.

I know that when one’s stake is small, it’s frustrating not to reach for ways to make big money fast — and options certainly hold out that possibility. Imagine having owned out-of-the-money Oxford puts before it dropped from 67 to 14. Or out-of-the-money calls on Apple before it jumped from 14 to 23. Or a zillion others. (In-the-money options would have been profitable, too, of course . . . but the longer the long shot, the greater the risk and the cheaper the options, and thus the greater potential return.)

I play with options, too, from time to time. Hard to resist. But I think any money you’ve made playing this game has probably come from me. One day, I fear, you will be passing it on to someone else (and no small chunk, in any event, to Uncle Sam).

 

 

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