Redditor Loses $10,000 In Occidental Derivatives Trade: Why Buying Options May Not Always Be The Best Strategy

A Redditor by the username "u/aknalid" recently posted in the ‘r/options' subreddit about their losing trade in Occidental Petroleum Corporation OXY options.

What Happened: The user, who acknowledged they are fairly new to options, highlighted, how they made $10,000 on Cloudflare Inc NET and Coinbase Global Inc COIN trades earlier in the year but then bet the amount on Occidental options.

See Also: How To Make Money With Options Trading

The Redditor stated they usually buy Call options with an expiry of over 3 months but accidentally ended up buying a one-month contract of Occidental options and held on to it. A screenshot posted by the user shows their losses at over $10,000 on a $66 Call Strike of Occidental options expiring on Friday.

Why It Matters: One of the biggest reasons why retail traders lose out to professionals in options trading is because the former mostly prefer buying options over writing or selling the instruments. It is important to remember that when a person buys options, time works against them. This means as the expiry date draws closer, a certain value of the options gets eroded — a phenomenon known as ‘Theta Decay.'

Buying Options: Here's an example to show how odds are mostly stacked in favor of option sellers. Occidental Petroleum shares were trading close to $61.55 levels on Feb. 6. Now, consider if an option buyer had bought the $66 Call on Feb. 6, anticipating the stock to rise. In this case, they would have had to shell out close to $1.26 per unit. Here are the conditions in which the buyer would have made money:

1. Occidental shares rise quickly above $66 in a short span of time which will lead to a rise in the option value as it will also have some time value left.

2. Occidental shares rise and stay above the ($66+$1.26) $67.26 level by March 3 when the option expires.

Selling Options: Now, consider the same user with a bullish view on Occidental shares who decides to write or sell Put options instead of buying Call options. Since OXY shares were trading close to $61.55 on Feb. 6, the person could have chosen to write or short $58 Puts expiring on March 3 at about $1.55 and hedge the position by buying the same quantity of $55 Puts at about 80 cents per unit. The user here would collect a premium of 75 cents per unit ($1.55-$0.8). Here are the odds of the seller making profits:

1. Occidental shares rise after the person takes the position and continue to stay higher. Both the option prices fall to zero and the trader keeps the 75 cents.

2. Occidental shares fall but end at $58 on the day of expiry. Both the option prices fall to zero and the trader keeps the 75 cents.

3. Even if Occidental shares fall below the $58 mark and trade at $57.25 as on March 3, which is the expiry date, the user would break even and not make any losses.

Looking at the conditions described above, it is clear that the probability of an option seller making profits or avoiding losses is mathematically higher compared to that of an option buyer.

However, in the lure of taking a trade using marginal sums of money, retail traders mostly prefer buying options over selling them. One other factor that discourages retail traders from writing/selling options is that the risk is unlimited while shorting options.

If one learns to limit their risks while shorting options using credit spreads as described above and does not fall into the lure of lower margin requirements while buying options, there could be a huge improvement in trading performances over the long term.

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