Vol 2, Issue 9. Quarter 4 – 2025.

I recently stumbled across a number of YouTube Videos with titles like, “Trading Options for Beginners,” and “Options Trading in 7 Minutes: How to Make $100 dollars a day,” and my new favorite, “Options Trading in 10 Minutes: How to make $1000 dollars a day| For Beginners Only.” I have been thinking for a few days about how to explain what a horribly bad idea this is. I haven’t completely got the messaging down yet, but I think that I have made a bit of progress, so here it goes.

Consider two players in a fictitious game. Let’s call the game TStock (any resemblance to a real game is strictly coincidental.) We also have two players. I will name them Smarty Sheldon, and Average Joe. The name Sheldon is borrowed from one of my all time favorite shows – The Big Bang Theory, which was a show largely about faculty and staff at Cal Tech, which may be the nerdiest place on earth. I don’t say that based on the show. I say it based on my visit to the campus and meetings with students, faculty and staff on site. The name happens to be an apt choice because most people don’t realize that roughly 30% of the folks who get PhD’s in Theoretical Physics in the US eventually work in the financial services industry.  This apparently happens because it pays so much better than teaching Physics, and they are the only people who can do the math in their heads that allows them to solve differential equations in real time. These folks are incredibly rare, and it is likely that you have only met 1 or 2 of them in your lifetime.  For our second player, we have Average Joe. If you don’t know who this is, just assume its you, because, no matter how much you want to disagree, it probably is. Just for the record – I’m an Average Joe as well.

Let’s say that our first player, Mr. Sheldon plays the game and calls himself a Mutual Fund, or a Pension  Fund Manager. This is likely to be the highest paying offer that he gets, so there is a reasonable chance that he will take it, as many of them do. In this game he picks stocks to manage the fund. This will be done by leveraging 100 or so equity analysts who each work about 80 hours a week to feed Mr. Sheldon information to help him play the game. With all of this intellectual horsepower, Mr. Sheldon will beat the average player about half the time and will lag the average play the other half of the time. This is not my guess, it is a statistical certainty.

Why?  Because Mr. Sheldon is completing with 1,000 other Sheldons (along with 1,000,000 Average Joes) but the money that each player like Sheldon is moving around is orders of magnitude greater than any of the Average Joes. In effect – the Sheldons effectively ARE the market. As a result, half of them beat the average and half of them don’t. This is true because no matter how smart they are, they will only beat half of the other people who are just like them on average.

Now, here comes the magic trick. If Joe Average buys the broadest possible index fund, he will be about average and his returns will match the market even though he does nothing else. No solving of differential equations. No 80 hours per week of analysis. No payoffs to Sheldon to do it for him.

Since you probably don’t believe me, do me a small favor. Visit, this link at S&P Global and look at the percentage of active fund managers who beat the S&P 500 index over the last 15 year period. You will see that 88.29% of them underperformed the index, while 11.71 beat it. If you like, you can look at other fund categories including domestic stocks, international stocks, and various fixed income (bond) categories. This is Mr. Sheldon’s track record. To be fair, this is partly because Mr. Sheldon subtracts a fee, which reduces his score. He does this because he is too smart to work for free (and I don’t blame him!)

But here’s the catch, most of Sheldon’s clients are still quite happy. The S&P 500 averaged about a 16% annual return since 2009 so even if you trail that and only got 15%, you are still quite a bit wealthier now than you were in 2009, so the game can go on like this for the foreseeable future. You don’t have to beat Mr. Sheldon, because you are not competing against him. You can simply go along on the same ride that he is on and you both end up pretty satisfied. This works because new people keep adding money to the market. The pie grows and both Sheldon’s and Joe’s little slice grows along with it.

A Slightly Different Game

Now, let’s consider a different arrangement. In this game – let’s call it TChess. (Any resemblance to a real game is strictly coincidental.) It’s a game that I just made up where each player has 16 pieces and they move in about 8 different ways. In this game, (that Mr. Sheldon has been playing for the past 10 years,) the rules are that there will always be one winner and there will always be one loser. Let us also assume that the only way that you make a penny is by beating Sheldon at this game. Let’s also say that some nice fellow explains the rules of TChess to you in 10 minutes and says – “ok, start playing.” How well do you think that’s going to work out for you?

Buying a share of stock is holding a claim on future cash flows associated with a company. That company has thousands of people working for it, doing everything that they can think of to improve those cash flows. You (and Mr. Sheldon) are allowed to go along for the ride, as they do all of the real work. You don’t have to take any money from Mr. Sheldon and he doesn’t have to take any money from you for you both to get paid.

Here is the key point. AN OPTION IS NOT A SHARE OF STOCK, IT’S A GAME OF TCHESS!!!!!. An option is a contract between 2 players. One party sells the option. He has to be paid to do this because by selling the option he is obligated to “make good” on the contract terms if the buyer exercises it. The seller has an obligation – not a right. That is why he must be paid to accept it.

The other party buys the option. He is willing to pay for it because it gives him a Right – but not an obligation. He will only exercise the option if it puts money in his pocket. That money MUST come from the seller of the option, because there are only 2 parties in this contract. Not one penny of the money that other people put into the market are relevant because an OPTION is a CONTRACT between only 2 people. Any profit made by one party is strictly a loss to the other. Mr Sheldon’s profit is Joe’s loss, or Joe’s profit is Sheldon’s loss. There is NO OTHER possibility. Those are the terms of the contract.

If Joe sells an option to Sheldon, Sheldon only uses it when it takes money out of Joe’s pocket. The total profit for the two players is $0. Let me repeat that. The total profit made on the deal is $0. If the profit for one player is $X, then the loss for the other player is exactly -$X. Understand, X + (-X) = $0. EVERY TIME. As a result, the expected profit for any player in the game is $0.

When you buy stock, the expected return is always positive. Otherwise, no one would buy it, unless they wanted to lose money. When you buy the option, the expected return is simply $0. If the total is $0 every time, then the average is also $0.

All of that is simple arithmetic. Here is where it gets interesting. You can shop for any option that you can imagine, but it will only exist, if someone else is selling that option at the same time. They are selling it because they believe that can take money out of your pocket. You are buying it because you think you can take money out of their pocket.

Who Was I Playing Again?

The question that you have to ask yourself is this. Is the person on the other side of this contract Smarty Sheldon, or Average Joe? The simple answer is that you have no idea, but consider this. Mr. Sheldon can easily write code to solve the same equations that he would solve in his head to price any option imaginable. He can also easily figure out the fair value of that option, and price it at 5% more than it’s worth, to see if anyone buys it. At the same time he can offer 5% less to buy it than he thinks it is worth and see if anyone is willing to sell it. Since this is all automated, it costs Mr. Sheldon nothing to generate millions of options, waiting for Joe Average to make a mistake. Money only changes hands if someone else joins the deal.

Does that mean that you won’t make money trading options? Of course not. You can get lucky at any thing, at any time. But understand this. Getting lucky is NOT a plan. You are placing a bet against someone else that is better trained, better funded, more experienced, and to be completely honest, simply smarter than you are. If that is the way the game is set up, what rational reason do you have to suggest that the expected value of your bet is above $0?