The Riskiness Behind the Popularity of This Trading Strategy

In 2021, options activity hit a record high, with nearly 9.9 billion contracts traded. That was more than 32 percent higher than the previous record set in 2020. This increase in volume can be traced back to the meme stock mania as millions of new investors jumped into the stock market during the pandemic. Options trading is a popular strategy among institutional investors to hedge their risk in the markets, but if it’s not executed carefully, it can lead to devastating losses. Watch the video above to learn how options trading took off and why the strategy can be so risky. “The idea that I used social media to promote GameStop stock to unwitting investors and influence the market is preposterous,” Keith Gill told Congress. Gill — who goes by DeepF------Value on Reddit and Roaring Kitty on YouTube — testified in front of the U.S. House of Representatives’ Committee on Financial Services in February 2021. He became an influential figure online and is credited with helping inspire the epic GameStop short squeeze. Gill would screenshot his investment portfolio, showing his winnings from his GameStop position. A lot of Gill’s portfolio consisted of what are called options contracts. Options are an investment strategy that gives a trader the right to buy or sell a security. “It’s best to think of options as an insurance product,” said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group. Over the past two years, options have become increasingly popular among individual investors using brokerage platforms such as Robinhood. “Twenty years ago, if you wanted to trade an option, you needed to maybe call up a broker on the phone, you needed to pay a significantly high amount of commission,” Murphy said. “So there’s much easier access to options markets, and the use of options has pretty much just grown alongside of that.” If used properly, options can be a good way to hedge risk. But they can also be risky. “Options are the kinds of bets where you can lose everything,” said Joshua Mitts, associate professor of law at Columbia Law School. “Unlike a share of stock, where you might see your portfolio go down by 5[%] or 10% in value, when you buy and sell options, you can lose all of your money.” “[Options] in and of themselves are not bad tools,” said JJ Kinahan, chief market strategist at TD Ameritrade. “Fire is a wonderful tool. If you don’t know how to use it, it’s going to end poorly.” » Subscribe to CNBC: » Subscribe to CNBC TV: About CNBC: From 'Wall Street' to 'Main Street' to award winning original documentaries and Reality TV series, CNBC has you covered. Experience special sneak peeks of your favorite shows, exclusive video and more. Connect with CNBC News Online Get the latest news: Follow CNBC on LinkedIn: Follow CNBC News on Facebook: Follow CNBC News on Twitter: Follow CNBC News on Instagram: Subscribe to CNBC PRO: #CNBC Why This Popular Trading Strategy Is So Risky...(read more)

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Why This Popular Trading Strategy Is So Risky Trading in financial markets can be highly lucrative, but it is also accompanied by significant risks. One popular strategy that traders often employ is known as "short selling." While this tactic can potentially yield substantial profits, it also carries a high level of risk. Short selling involves borrowing shares of a stock from a broker and selling them with the intention of buying them back at a lower price in the future. Traders employing this strategy are essentially betting that the price of a particular stock will decrease. If the price indeed drops as anticipated, the trader can repurchase the borrowed shares at a lower price, return them to the broker, and pocket the difference as profit. However, there are several reasons why short selling is considered a risky strategy. Firstly, unlike traditional investments, where the potential losses are limited to the amount initially invested, short selling has unlimited downside risk. If a trader's prediction fails and the stock price rises instead of falling, the potential losses can be significantly greater than the initial investment. Another risk associated with short selling is the potential for short squeezes. A short squeeze occurs when there is a sudden, unexpected increase in the stock price, forcing short sellers to cover their positions by buying back the shares at a higher price than they sold them for. This surge in buying activity can further drive up the price, resulting in a domino effect that can lead to substantial losses for short sellers. Furthermore, short sellers are exposed to the risk of margin calls. Margin trading allows traders to borrow funds from a broker to leverage their positions. However, if the stock price rises significantly, brokers may require additional collateral to cover potential losses. If a trader fails to meet these margin requirements, they may be forced to close their position at a loss. Short selling also carries reputational risks. Critics argue that short sellers can contribute to market downturns by spreading negative information or rumors that can artificially drive down stock prices. This can result in significant losses for long-term investors and undermine market stability. Regulators have implemented certain restrictions on short selling to mitigate some of these risks. For example, some jurisdictions enforce rules such as uptick or circuit breaker regulations to prevent short sellers from piling on stocks experiencing a rapid decline in price. In conclusion, short selling can be an attractive strategy for experienced traders seeking to profit from declining stock prices. However, it entails significant risks. Unlimited downside potential, short squeezes, margin calls, and reputational risks are all factors that contribute to the high-risk nature of this strategy. Traders should carefully assess their risk tolerance and employ risk management strategies to protect themselves from potential losses. https://inflationprotection.org/the-riskiness-behind-the-popularity-of-this-trading-strategy/?feed_id=136459&_unique_id=6504a74675c45 #Inflation #Retirement #GoldIRA #Wealth #Investing #breakingnews #business #cable #cablenews #CNBC #financenews #financestock #financialnews #gamestopshort #gmeshort #memestock #money #moneytips #news #newschannel #newsstation #redditgamestop #reddittrading #RoaringKitty #stockmarket #stockmarketnews #Stocks #Trading #tradingstrategies #usnews #wallstreetbets #worldnews #FidelityIRA #breakingnews #business #cable #cablenews #CNBC #financenews #financestock #financialnews #gamestopshort #gmeshort #memestock #money #moneytips #news #newschannel #newsstation #redditgamestop #reddittrading #RoaringKitty #stockmarket #stockmarketnews #Stocks #Trading #tradingstrategies #usnews #wallstreetbets #worldnews