Clark Howard has stark warning about options trading without educating yourself

ATLANTA — Channel 2 consumer adviser Clark Howard warns investors could lose big money if they traded without educating themselves first.

That warning comes after retail trading apps have seen an uptick in the number of users. Robinhood alone accumulated 3 million new accounts in the first four months of 2020.

Many of those traders have been drawn to something called options trading.

“Trading, options and other esoteric strategies are, really, for people who are hyper experienced, not for a newbie,” Howard said. The risks include losing money and paying a ton of taxes.

Jean-Christophe Gilbert, 23, has been options trading for several years. He’s seen the rise in traders firsthand. His Facebook page, Options Trading 101, quadrupled its membership since the start of the COVID-19 pandemic.

“I guess there are several factors in it — maybe the quarantine, maybe the hype around options and the snowball effect itself,” Gilbert said.

His number one goal is to make sure page members understand what they’re getting into when they trade options.

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“It’s important for you to understand what you’re doing because the worst-case scenario is going to happen. And it’s not even about thinking about the upside of how much could I earn. It’s more understanding what is the downside,” he said.

Options trader Bill Brewster is dedicated to that philosophy.

He lost his 20-year-old cousin-in-law Alex Kearns last June. Kearns took his own life after wrongly believing he’d lost over $700,000 trading options on Robinhood.

“I think it’s a really simple thing to lose money doing. I think that if you actually want to make money, better know what you’re doing,” Brewster said.

He’s concerned apps like Robinhood make trading seem like a game.

“When you execute a trade, confetti pops off,” Brewster said. “I just fundamentally do not think investing is a game, and I fundamentally don’t think that options trading is a game. I think that if you introduce that behavioral psychology into financial dynamite, you are going to get explosions.”

Robinhood has since made changes to its platform, announcing in a letter on Facebook: “We are expanding our educational content related to options trading. We have added information on early options assignments to our help center and we will be hiring an Options Education Specialist to further enhance education related to our options offering.”

Julien Simon, 18, told Channel 2 Action News that he started day trading with Robinhood three years ago with the help of his mother.

“I used Robin Hood because it was an interesting way to sort of get into day trading and to kind of figure out how the world works, how the New York Stock Exchange works and just kind of get into the way that people make money in that,” Simon said.

These days, he sticks to Vanguard index funds. The time it took to research his trades on Robinhood wasn’t worth the payoff for him, and options trading didn’t appeal to him.

“It was very, very confusing. It took a lot of reading just to understand what exactly option trading was,” Simon said. “But once I found out, I was a little intimidated by it. It seemed to be very much all or nothing — as in you kind of win a lot or you lose everything. And that wasn’t something I was all too interested in.”

Now Simon runs a wedding venue in northeast Atlanta with his mother. He’s also getting ready to buy a house. He credits trading with Robinhood for his financial savvy.

While Brewster trades options himself, he warns others to be aware of what they are doing.

“If you think you’re not going to a casino, you’re out of your mind. I mean, you are, and you’re playing against really, really sharp people,” Brewster said. “I just — I really, really would encourage people, especially in options trading, to trade small contracts, to take it slowly to understand what they’re doing.”

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