The Day Traders Are Back – June 2020

My first experience with a day trader was in a New York City cab. The cab driver had a laptop next to him on the front seat. He made a point of telling me he was a day trader and he was driving a cab temporarily. Until he made a fortune day trading.

He told about some of his big wins. I asked him about him about his losses. The conversation ended there.

The year was 1998 and the dot com bubble was well inflated. By 2001 the bubble burst and the day traders were gone. 

What defines a day trader is someone who buys and sells stock on, you got it, a daily basis. There are professional day traders who have been at this a long time. 

Now there is a new type of day trader, the “there is nothing to bet on except the stock market” day trader.

This day trader has no interest in buying and holding stocks for the long term.

Day traders are not investors. New to the markets they often have no idea what they are doing. Buying the stock of a bankrupt company? What are they possibly thinking? They are thinking the company will be bailed out.

Borrowing money, known as “margin,” to buy more shares? That is called leverage and leveraging your portfolio can get ugly quickly if the price of a stock moves against you and you receive a margin call as in “pay up”. 

I have read that many of the new day traders are using options and option strategies. 

Trading options is a very different part of the investment world. It  takes time, knowledge, and skill to employ option strategies successfully.

An option is a contract. The contract specifies a price where a stock can be bought or sold. Where it gets complicated for us mere mortals are the number of specifications contained in the contract. 

I read with great sadness the story of a young man, 20 years old, who started trading options.

In the note he left behind he admitted he did not know what he was doing. From  the stories I read, he did not understand the basics of options accounting.

I have many unanswered questions about what happened that will never be answered. By default, someone so young would not have enough experience to trade options. 

Investors who know what they are doing use option strategies. Options can allow a portfolio manager of a large mutual fund to fine tune investment strategies.  Options are a tool. You must know how to use the tool. 

There are some things in life you do not do . After four months of stay at home my garden is looking like the forest primeval. My little clippers don’t cut it  (literally).

 A chain saw would be quicker and more effective, but I would never buy a chain saw to trim my trees. I do not know how to use a chain saw and it would be incredibly risky and stupid to think I can pick one up and start sawing away. Things could go wrong very quickly.

The same is true of option strategies.

Would I ever recommend using options to novice day traders?

Never. They have no experience using the tool.

Today we are experiencing a new generation of day traders. Casinos are closed. There are no sports events to bet on. There is no place to gamble so hey, lets try the stock market. 

Encouraged by the ease of online trading without transaction fees, several million people have jumped into the day trader hot seat since the “stay at home” went into effect.

Day traders may be having fun racking up losses, there are websites that extoll how much someone has lost in a day, but it is not fun for you or me to see stock price volatility day to day.

On the other hand, if you are a long-term investor and willing to wait a couple of years why not buy a few shares ? The key word is “wait”. Waiting takes patience.

Remember this. Trading is a two-way transaction. If one person is losing money it means someone else is making money.

Day trading is not the same as making an investment decision. The way I look at this, novice day traders will eventually lose all their money and they will be out of the market.

Another way to think about this is that day traders are creating opportunities for the long-haul investors to buy shares at a discount.

Who doesn’t love a good sale?

This website is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation for any security, nor does it constitute an offer to provide investment advisory or other services by The Modest Economist LLC.