Want to Know Why the Stock Market Sucks?
Simply put, sometimes the stock market sucks. Sometimes, it’s difficult to make money. Not making money is one thing, but losing it is a whole different ball game. Nobody likes losing money. When was the last time you bought a stock and make a 100% ROI? A stock you’ve been holding from 20 years ago? If you recently made 100% on a long stock position in less than one year, congrats. I honestly don’t know how many trades I’ve made throughout my life, but I have NEVER had a long (or short) stock position that has yielded 100%+ on it’s own. Maybe I suck at investing. However, I have had dozens of options and futures trades that have netted well over a 100% ROI. See my documentation of how I turned a $9,000 account into $25,000 trading futures options by only using $5,000 in buying power.
If exclusively buying and selling stocks works for you, that’s great. But speaking on behalf of everyone at The Options Bro, exclusively trading stocks SUCKS. It has seldom worked for us. And the number one reason why we don’t do it is because options and futures are simply better.
The fees for stocks are high, the leverage is awful, and the liquidity is not as good as you think.
The Problem With Stocks
Routing for stocks in the United States is completely ridiculous. Take a look at this graphic below that compares the routing of stock orders vs futures orders. Notice anything?
(Credit: Nanex, LLC)
Look at how many different exchanges, liquidity providers, ECNs, dark pools, etc. there are for the stock market. It’s insane! When you submit an order to buy 1,000 shares of AAPL, it’s not getting filled on the Nasdaq. Some third party market making firm is likely internalizing your stock order and simultaneously profiting a couple pennies at a time. Essentially, this is known as HFT, or high-frequency trading.
The debate as to whether HFT provides liquidity to the market and reduces bid/ask spreads or constantly rips of retail customers is a tossup. There’s valid arguments on both sides, and The Options Bro writers/traders tend to agree that in general HFT provides more liquidity in the market; or at least it provides the illusion of liquidity.
Regardless of whether HFT is a good or bad thing, it’s here to stay in the stock market. The futures market, however, is far simpler. There’s no room for manipulating fractions of pennies from orders.
Even if the complex order routing procedures for US stocks are ripping off retail traders in very small increments, there are ways to push back without venturing to the futures market. For one, you can continuously sell calls against long stock positions, or sell puts against short stock positions.
I’d so much rather buy 1,000 shares of stock and sell 10 covered call options against it every month with 30 days until expiration than solely buy 1,000 shares. If the stock moves down by the time expiration rolls around, I’ll get to keep all of the premium. And if the stock soars past my covered call strike price, so what? I’ll still get to keep the premium, and I would still profit from owning the stock, it would just be limited.
If your investment thesis is to buy-and-hold stocks, there really is not a solid argument in favor of only holding stock and not reducing your net position value with options. There is no extra risk with covered calls or covered puts besides a potentially limited upside or downside profit, respectively. Trading options around stock positions unequivocally makes the stock market suck less.
Day Trading Requirements
The requirements to trade stocks and stock options on an intraday basis are stupid. If you want to make more than 3 stock or stock options trades per week, you need to have $25,000 or more in your account. If you don’t FINRA will flag you under the PDT rule (Pattern Day Trader) and your account will be limited to closing transactions for 90 days. In other words, if you initiate and close a stock or stock options position in the same day more than three times in one week, you’re going to be in hot water. For the first offense, you broker might issue a courtesy warning and let it slide, but don’t bank on this.
Futures and futures options on the other hand have account requirements for intraday trading. You can trade as many futures contracts as you wish in one day and never half to worry about the silly PDT rule.
To some extent, the degree that the stock market sucks also depends on your time horizon. If you are a buy-and-hold investor with a time-frame of 10+ years, then the stock market isn’t so bad even with all of the HFT nonsense. Buying low-beta, blue chip companies, or merely buying large-cap indices is a great way to seek long-term capital appreciation.
They keyword in that statement is “long-term.” My 300% gain on my options trade last month took one day. Most people are impatient when it comes to making money, and passively investing in the stock market doesn’t help. This is another reason why the stock market sucks; it just takes too long to make a profit.
Obviously, there is a lot more risk involved with actively trading options and futures, but this means the reward is better.
Why Options and Futures are Better
We are absolutely convinced that futures are better than stocks, and that options on both futures and stocks make both assets even better.
One of the biggest differences between stocks and futures is leverage; this is the primary reason why futures are deemed as risky.
The notional value of 1 Emini S&P 500 futures contract is equivalent to 50 times the value of the S&P 500. However, the margin requirement to hold 1 Emini S&P 500 contract is typically only around 5% of the value of the underlying. These margin requirements, which are set by the CME, can fluctuate with rising volatility, but they usually hover around $5,000 for one contract.
To create the same position using SPY, assuming a typical Reg T margin account, you would have to have approximately 50% of the notional underlying value which would be around $60,000
1 ES futures contract = 500 shares of SPY
Both instruments track the same asset, the S&P 500. So why do traders use more buying power to hold SPY?
The Stock Market is Expensive
Depending on your broker, the average cost of buying 500 shares of SPY can be anywhere from $4.95 to $9.95.
The price of buying 1 futures contract, however, typically ranges from $1.00 to $2.25 plus exchange fees.
To review, 500 shares of SPY and 1 ES futures contract are equivalent, but there are some differences in the two positions:
Margin requirements for ES futures are lower than SPY
Cost of trading is lower for ES than SPY
ES futures trade almost 24 hours a day; SPY stops trading at 8:00pm EST
ES futures offer a capital gains tax advantage of 60/40
Does this not explain why the stock market sucks? Who would trade 500 shares of SPY? If you’re not trying to trade individual stocks, just about everything is better with futures. As if that weren’t enough, the options on ES futures are just as liquid as SPY! And they are tradable throughout the night!
Futures with TradeStation only cost $1.20 per side, and go as low as $0.25 per side depending on monthly trade volume.
What You Should Do
The aim of this article is not to try to convince everyone to stop trading stocks and switch over to options and futures. Rather, the aim is to bring awareness to some of the fundamental problems that the “stock market” has and how futures and options trading can solve those problems. A lot of traders eschew futures because they prefer the nature of individual stocks, i.e. earnings reports, fundamental factors, etc. But a lot of the same fundamentals of stocks apply to futures. Crude oil futures move based on supply and demand just like TSLA moves on supply and demand.
Futures and options are definitely higher risk forms of investments than stocks, but they simply offer things that the stock market doesn’t. Namely, options for both futures and stocks offer ways to reduce cost-basis and increase leverage.
Of course, options and futures are not for everyone because they are inherently more risky and sophisticated forms of investing, but even for the individual investor who only trades stocks, there’s no question that a basic understanding of options strategies can enhance a long stock portfolio. Covered calls are probably one of the safest forms of options trading, and it’s a proven way to collect option premium with limited risk.
There’s no need to dump all of your stock positions and solely trade futures and options. Instead, having an open mind and looking at all of the instruments that are available to trade (futures, stock options, futures options) will make you a more well-rounded trader and make the stock market suck just a little bit less.