Every day the stock market moves. Every day professional traders make money. Your 401k, on the other hand, typically only makes money if the market moves up. Its easy for the professionals to make money. We can exploit your fears to make money to the downside, or ride your wave of bliss when the market is doing well.
What we professionals love to do is find an extremely volatile stock. A volatile stock will move quickly and often. When we find a volatile stock, we use something called a butterfly spread. Put very simply, we buy put and call options on a single stock with the same expiration date. Then, so long as the stock moves one way or the other we make money off of it.
Say we buy a put option for Company X for $50 when it is currently trading at $51. We also buy a call option on it for $52.50. If its a volatile stock, Company X should easily bust out either below $50 or above $52.50. If we’re real lucky, it could do both before our options expire and we make money both ways! It is extremely simple for Wall Street to do this.
Meanwhile, for an individual investor to be able to use this type of options spread you would need to get approved for level 4 options trading. How do you do that? Well, the first qualifier is to have more than $250,000 in your account. You have that right? No problem. Then you have to show your trading prowess, experience, and expertise before you can be approved for level 4 options trading. Most individuals can’t get approval for this level of trading.
So while we, Wall Street, bar your from using a simple butterfly spread on stocks, we are using it every day to make money off your fears and joys. So much for a level playing field. Wouldn’t you agree?