Do Options Make Money?

Dear Friend in Finance,

A friend recently told me about something called “stock options.” He described it as a way to invest in the stock market more safely—almost like a form of insurance. He said he uses them every week and that I could potentially benefit from the market going up without taking on much risk.

I’m curious: what exactly are stock options? And are they really safer than regular investing?

Sincerely,

Looking for an Option

Dear Looking for an Option

Stock options have exploded in popularity over the past decade—especially since the market’s COVID rebound. For many people, they feel like a clever shortcut to quick gains. Your friend might have said it’s like “insurance” or “a safer way to invest.” But let’s slow down.

First things first: what are options, really?
There are two main types:

• A call option gives you the right to buy a stock at a specific price before a specific date.
• A put option gives you the right to sell a stock at a specific price before a specific date.

You can also sell options. But here’s the key difference: when you sell, you’re taking on an obligation. Sell a call, and you’re obligated to sell your shares if the buyer exercises. Sell a put, and you may be obligated to buy the stock if it drops.

People get excited about buying options because it gives them a way to benefit from market moves without putting up a lot of money. But that low cost is misleading—because what you’re really buying is a bet with an expiration date.

Let’s talk about the part your friend might not know.
A study from MIT found that retail investors lose 5–9% on average when trading options around earnings announcements—and up to 14% in especially volatile stocks. In India, the Securities and Exchange Board found that 89% of individual options traders lost money in a single year.

Why? Because they’re often playing a game they don’t realize they’re playing—and the house is very good at it.

Options are a zero-sum game: for every winner, there’s a loser. And it gets worse—because just like in a casino, there’s also a house that takes a cut. That “house” includes market makers, platforms, and trading fees. So even when someone wins, they may win less than expected, because the structure is quietly shaving off value along the way.

In other words, you're not just betting against another trader—you’re betting in a system where the odds are tilted by design.

Retail investors often don’t have access to the high-speed data, pricing models, or research teams that give professionals their edge. And in options, edge matters. If you're not pricing risk correctly, you're just guessing.

Even when you guess right, you can still lose.
Here’s a surprising fact: you can be right about the direction of a stock—and still lose money on an option.

Why? Because of something called time decay. Every day that passes, your option loses a little value—just from the passage of time. That’s because options have expiration dates, and the closer you get to the deadline, the less time there is for your bet to work.

Think of buying an option like being in a small boat with a slow leak. You need to reach the island (your profit target) before the boat sinks (the option expires). Even if you're rowing in the right direction, you can still come up short.

So why do most retail traders lose money over time?

• Expiration risk: Unlike stocks, which you can hold forever, options are constantly ticking toward zero. If your scenario doesn’t play out in time, you’re left with nothing.
• Steep learning curve: Options strategies can be mind-bendingly complex. Without deep experience, it’s easy to take on much more risk than you realize.
• Overhyped trades: When social media or message boards hype up certain trades, retail investors pile in—often paying inflated prices that reduce their odds of making money.
• Tax surprises: Even when you do win, short-term options gains are taxed at your ordinary income rate—not the lower long-term capital gains rate. That can eat up a bigger chunk than expected.

Is it safer than regular investing?
On paper, buying options only puts a small amount of money at risk. So technically, yes—you can limit your losses.

But behaviorally? Trading options are one way to turn investing into gambling. The repetition, the near-wins, the fast pace—it all mimics the same feedback loops that make slot machines addictive.

Options trading might feel like investing. But in practice, it’s often a string of small bets. And over time, most people don’t come out ahead.

So, what should you do?
You don’t need to take my word for it. Just ask yourself this:

What would need to happen, and by when, for this option to be a good trade?

If you can’t answer that confidently, you might not be investing—you might just be hoping.

The bottom line?
Options can serve a purpose. But if you’re not careful, you’ll take on all the risk of investing—with none of the long-term upside.

So I’ll leave you with this question:
Are you trying to invest—or are you looking to gamble?

Sincerely,

Your Friend in Finance