I was showing an old trading buddy around my options website last week and he thought it would be interesting to ask an option question to ChatGPT, the hugely popular AI interface.
The question he asked was,
“Looking for ideas on trading options ETH for long term bullish”
He forwarded me the reply and its contents were surprising:
“There are a few different strategies you could consider for trading options on ETH with a long-term bullish outlook:
Long call options: This strategy involves buying call options on ETH, which gives you the right to purchase ETH at a set price (strike price) at a later date. If ETH’s price rises above the strike price, you can exercise your option to purchase ETH at a lower price and then sell it at the higher market price.
Bull call spread: This strategy involves buying a call option with a low strike price and selling a call option with a higher strike price. This limits your potential profit but also limits your potential loss.
Long put options: This strategy involves buying put options on ETH, which gives you the right to sell ETH at a set price (strike price) at a later date. If ETH’s price falls below the strike price, you can exercise your option to sell ETH at a higher price and then buy it back at the lower market price.
Bull put spread: This strategy involves buying a put option with a high strike price and selling a put option with a lower strike price. This limits your potential profit but also limits your potential loss.
It’s important to note that options trading is generally considered to be a more advanced form of trading and carries a higher level of risk. It is important to thoroughly understand the risks and mechanics of options trading before considering any of these strategies.”
The Mistakes
The most obvious mistake is the recommendation to buy put options. Buying put options is a clearly bearish strategy. I think that ChatGPT may have been confused by the idea of buying back the underlying after shorting it through exercising the long puts. It saw buying as a potential long strategy rather than covering a short. Clearly this suggested trade is wrong though for someone with a bullish view. (I’m not going to delve into the regulatory implications of advising a clearly incorrect trade!)
I was more intrigued though by the description of a bull put spread; it was also completely wrong.
So I jumped onto ChatGPT and looked specifically for bull put spread.
Bull Put Spread
But before I discuss the answer, let’s first understand what a bull (and bear put spread is).
A put spread involves simultaneously buying one put and selling another of the same maturity but of a different strike price.
If we buy a higher strike put option and sell a lower strike one, this strategy is called a long put spread or a bear put spread because it profits when the market falls. If the underlying market falls, the long put will become In-the-Money first and be worth more than the short put hence the strategy should make money on a down move (for more on options strategies visit my free course at www.learnoptions.net).
A bull put spread (short put spread) is so called because it should profit from a rising underlying market. To achieve this, a bull put spread sells the more expensive higher strike put option and buys the cheaper, lower strike put. It therefore receives premium which the seller will keep if the underlying market rallies. This strategy should lose money if the underlying market falls.
So let’s see my question to ChatGPT and its answer:
The first part of this answer is wrong. Buying a put and selling a put of a lower strike (short leg) is a bear or long put spread.
So then I asked ChatGPT to define a bear put spread:
The first part of the answer is the same as for a bull put spread which obviously can’t be correct.
Too much bulls*t even for AI
Don’t get me wrong, I don’t expect perfection from these AI interfaces. Having watched AI hedge funds continually underperform the market for years, I still think this technology has a long way to go.
But what it does demonstrate is just how much options related bullsh*t is out there. Having looked around for information on option strategies, ChatGPT found a definition of a bull put spread that it was comfortable was accurate.
If ChatGPT struggles to find accurate information on options, it shows how difficult it is for the average retail trader.
There has never been so much trading related content available to retail traders. The problem is that a huge percentage of this content is rubbish.
This is the main reason why I decided to make my basic options course free. I wanted to provide a trustworthy source of options education and help new option traders navigate through the BS.
So, if you are keen to learn some real knowledge about option, check out www.learnoptions.net
Perhaps humans can outperform AI!
Keep Grinding
Gary
