TL;DR

A Reddit user’s foray into options trading highlights the dangers of speculation without sufficient knowledge. The situation mirrors past financial crises where the lack of understanding cost many their savings.

Story

John, a novice investor, thought he’d cracked the code. He saw a Reddit post boasting about ‘straddles’ and ‘strangles’—exotic options strategies promising big bucks. He didn’t understand them, but the comments were filled with braggadocio. Like a moth to a flame, he jumped in. It looked like this: He bought options contracts, betting the price of an asset would move wildly in either direction.

Turns out, it wasn’t a ‘straddle’ at all; it was a ‘strangle’.

‣ Straddle: Buying both a call and put option with the same strike price and expiration date.
‣ Strangle: Buying a call and a put option with different strike prices.

His ‘strangle’ was poorly constructed – a wide, expensive bet that needed a massive price swing to even break even. The commentators, meanwhile, were mostly laughing at him. Many were likely selling these options to him. They knew he was making a risky, likely losing wager. The comments highlighted how the majority of the money was in the hands of those who understood the strategy.

This isn’t just a tale of options trading; it’s a microcosm of bigger scams. It mirrors the hype-and-dump cycles that have haunted investors since the tulip mania, recalling Enron and the 2008 housing bubble. The same lure of easy money, the same blind faith in internet gurus, the same devastating losses. John’s story serves as a potent reminder that complex financial instruments can be elaborate traps for the unwary. It’s a case of sophisticated markets leading to simple losses.

Advice

Don’t chase get-rich-quick schemes. If you don’t understand an investment, walk away. Remember that ‘guaranteed returns’ are usually guaranteed losses for someone.

Source

https://www.reddit.com/r/wallstreetbets/comments/1l9n1mw/am_i_doing_this_whole_straddle_thing_right/