[skrtskrt]

A good example is selling options for premium.

You can sell a put option against a stock.

Say the stock is $100 right now, and you sell a put option one month out for a strike price of $90.

The seller of this put option essentially bets that the stock will still be above $90 in a month.

The buyer of this put option is betting that the stock will be below $90 in a month.

For executing this trade, you, the put seller, receive premium, say $1. The buyer pays you $1.

You have a sold a very high likelihood bet and received $1 for taking on the risk. The buyer has bought a very low likelihood bet and spent $1 for the chance to win.

This sounds great! In the long run, stocks tend to go up so you should win this bet the vast majority of the time, collect your $1, and make the same bet again.

This is the "picking up pennies" stage.

Now what is the steamroller? The steamroller is the low likelihood but very high loss scenario that this stock or ETF absolutely crashes while you are on the selling side of this open put option bet.

If it crashes to $N where $N < $90, the put option buyer has the option or right to sell you the stock at $90, even if it is worth hardly anything. So you have now paid $90 for a stock worth less than $90. It could be $0, the company could be bankrupt. Your loss is -($90-N)+$1. (Note that because of your $1 premium, your breakeven on this trade is when the stock is at $89, not $90.)

If you put up the collateral (the money needed to buy the stock at $90) for the bet with your own money, you are out that money. If you put up collateral on margin (borrowed money) you can be mega screwed.

This is the steamroller. You picked up $1 here and and there but then you got hit with a -$20 or -$50 or -$90 steamroller when you may have not even had the money to cover it.

Yes the steamroller is very low likelihood, but you have to hit pick up a LOT of pennies in a row to still come out on top after getting hit by the steamroller.

It is important to note that there is a ton more nuance that can go into running this kind of strategy, but in general for the average person, buy and hold will always outperform a strategy like this for several reasons, not least of them being that the income received for premium is taxed at income rates, where gains from buy and hold will be taxed at capital gains rates.

Very sophisticated investors do run this strategy with many ways to handle the tail risk, and their sophisticated strategies do not necessarily stop them from getting absolutely screwed when things go bad like during the flash crash at the beginning of coronavirus. Modeling and mitigating tail risk is hard, because terrible events are not as common as normal events and when things go terribly, they usually go terribly in a way no one has ever seen before.

[jdasdf]

Just a quick note here, selling puts is actually the worse of the examples you could have mentioned, because you can simply use it as a way to maintain an open order for the stock at a given price while getting paid for it.

Selling calls would be a better example, since in that case losses are potentially limitless.

[skrtskrt]

True, but a casual investor is less likely to sell naked calls with infinite loss.

When they sell covered calls and lose the bet, the only loss is missing out on the run up of the stock.

I mostly just used the put example because it maps better to compare to a buy and hold strategy - good if market is up, bad if market is down.

It's also a well-known pennies-in-front-of-steamroller strategy that hedge funds have gotten very publicly burned on before, so anyone interested could research more.