Trading options versus playing poker

optionMONSTER

In Chicago, home to the CBOE and CME, many people know what an option trader is. But that's clearly not the case in other parts of the country.

Recently I was asked what I did for a living by someone in the Northeast, and I had trouble with the answer. I often feel like making something up when this happens--but I realized that some aspects of trading are analogous to online poker, without the negative gambling connotations.

Some of you will immediately see the correlation. And many professional traders, especially option traders, are in fact also poker players.

Aaron Brown, a quant from the prominent hedge fund AQR, wrote a book on it called " The Poker Face of Wall Street ." And one of my favorite traders, Ed Thorp, penned the poker book " Beat the Dealer " before writing " Beat the Market ." (Thorp is also featured in Jack Schwager's new book " Hedge Fund Market Wizards ," which I am working my way through.)

From a certain perspective, telling someone that I am essentially a professional online poker player makes sense because many people already think that trading is as good as gambling. And it certainly can be.

View photo

.
Aces
Some "traders" would probably be better off going to a roulette wheel and laying all their money on black or red, as that may well be the best they could do without having a probability edge. But therein lies the difference between my job and the tables.

Gambling is laying down your money where you don't have an advantage--or, as Dickson Watts writes in " Speculation as a Fine Art ," where there is no calculation.

Another way of looking at the difference is that of luck versus skill. Winning at roulette is usually just a matter of luck; winning at poker, at least consistently, is a matter of skill.

The same can be said of traders. Those who are simply lucky may find a winning trade, but most of them won't last long in the market because they are gambling. Those who have skill, on the other hand, may lose a given trade but still have the probability of success on their side in the long run.

Part of that skill is trade structure, and part of it is risk management. Leveraged put selling , for instance, requires relatively little skill yet can make money most of the time if done properly. But when one of those " fat tails " comes along, those traders get crushed.

Risk-managed volatility selling , on the other hand, does require skill and won't be subjected to potential ruin in the same way. Such trading is essentially the focus of Thorp's "Beat the Market."

So the next time someone asks me what an option trader really does, I might just tell them it is like being an online poker player and see where the conversion goes.

(A version of this article appeared in optionMONSTER's What's the Trade? newsletter of June 27.)

More From optionMONSTER

Rates

View Comments (1)