In last week’s conversation with Swiss author Thomas Meyer, we discussed that it doesn’t make sense to punish companies you hate, for instance VW because of the emission scandal, with options or short selling. It is way too dangerous and also way too expensive. The example of VW showed how dangerous this can be, because their stock has been going up continuously after the scandal.
How can that be? The reason is that stock prices react immediately and don’t fall continuously over the entire problematic time. After a scandal happens, there is an immediate strong correction. Afterwards, the price can improve even if more bad news emerge, because people realize that the market initially overreacted.
People often think they know where stock prices should go. As a consequence, they want to use options to take advantage of short-term fluctuations. The problem is that this simply doesn’t work. In the short term, stock prices are entirely random. Even investor legend Warren Buffet wouldn’t make statements about the stock development for the next weeks or months. Like all sensible people, he knows that it’s not possible to predict these things.
Nonetheless, options remain very popular. Basically everyone that invests in stocks will sooner or later deal with options. However, the truth is that you should stay away from them completely because options trading is always a pure gamble. Unless you have insider knowledge, which is a criminal offence.
So Thomas Meyer is staying away from options. There are plenty of other things that can be scary about the stock market. We will talk about some of them next week.