I live in a rural area of New England and often have trouble explaining exactly what I do as an options trader. Sometimes I think I should just make something up, but I realized that the closest I could probably come to someone with no reference point could be online poker player.

Now some of you will immediately see the correlation. Many professional traders, especially option traders, are also poker players. Aaron Brown, a quant from AQR, a prominent hedge fund, actually wrote a book on it called The Poker Face of Wall Street. And one of my favorite traders, Ed Thorp, wrote the poker book Beat the Dealer before he went on to write Beat the Market and amass one of, if not the, best professional track record. Thorp is featured in Jack Schwager’s book Hedge Fund Market Wizards.

From a certain perspective telling someone that I am essentially a professional online poker player makes sense. Many people think that trading is as good as gambling. And it certainly can be. Some “traders” would probably be better off going to a roulette wheel and laying all their trading capital down on one play. That is the best thing to do if you don’t have a probability edge.

And therein lies the difference. Gambling is laying down your money where you don’t have an edge, or as Dickson Watts in Speculation as a Fine Art says, where there is no calculation. Another way of looking at the difference is that of luck versus skill. Winning at roulette is a matter of luck. Winning – at least consistently – at poker is a matter of skill (interesting research along those lines here: http://papers.nber.org/papers/w17023).

The same can be said of traders. Those who are just lucky may win this or that given trade, but most of them won’t last long. They are gambling. Those who have skill, on the other hand, can be unlucky with any given trade, but put the probability of success on their side.

Part of that skill is trade structure. And part of it is risk management. Leveraged put selling, for instance, requires no skill. Those that use the strategy will make money most of the time. But when one of those “fat tails” comes along, they get run over by the proverbial steamroller. Risk managed volatility selling, on the other hand, does require skill, and it won’t be subjected to potential ruin. Such trading is essentially the focus of Thorp’s Beat the Market.

Those with an edge, those using “calculation” and skill aren’t gambling and are likely to succeed, whether they are poker players or traders. So the next time someone asks me what an option trader really does, I might just tell them it is like an online poker player, and see where the conversion goes…