For years on this blog, I have posited a link a between IQ and options/stock trading success, in that smarter traders tend to be more successful than less intelligent ones. Aggressive out-of-money call options trading, which is the dominant strategy on the hugely popular Reddit sub /r/WallStreetBets, is often likened to playing the lottery, as it is assumed that the role of luck dominates any skill. Thus one would be inclined to believe that IQ has little or no bearing on option trading success, because of the outsized perceived role of luck.
However, the evidence possibly show otherwise, that in spite of the seemingly normal–hence, random–distribution of option trading returns, it is still possible to find traders who beat the odds and exhibit actual skill. As further evidence of the role of IQ in trading success, and how having a high IQ is highly predictive of option trading success on /r/WallStreetBets, a recent story from the Wall St. Journal caught my attention, as it agrees with my hypothesis–A small-time trader turns $500 into more than $200,000.. The article is paywalled, but it is about Anubhav Guha, an MIT graduate and participant of r/WallStreetBets, who turned $500 into $200,000 with Gamestock call options during the infamous GameStock short-sqeeze in January 2021, which nearly bankrupted two hedge funds that were short the stock.
Anyway, the part the stood out is that Anubhav Guha, who is 24, is also a graduate from MIT, which is arguably one of the world’s most demanding and prestigious colleges, both in terms of the low acceptance rate (just 7% among an already exceptional self-selected pool of applicants) and the taxing curriculum, and is often in the top 5 of national university rankings. MIT graduates are pretty much guaranteed good employment are found in top positions of society and in the private sector, but also even politics (such as former New Hampshire governor John H. Sununu, who earned a Ph.D from MIT in mechanical engineering). Getting into MIT, which requires top-ranking test scores on standardized tests and exceptional STEM aptitude, and then graduating in a technical field such as engineering, is indicative of at least an IQ 140, based on the rarity of such scores and correlation with IQ.
The nice thing about /r/WallStreetBets and Reddit is, is unlike hedge funds, which guard their strategies, everything is public and the culture of the sub encourages sharing for ‘meme value’ and to build one’s status and credibility, and thus there is a lot of data that can be crunched to find strategies. In large part due to GameStop, hedge funds have taken an interest in /r/WallStreetBets, and periodically, with the help of software, scan the sub to find the next short squeeze, so they can either cover in case they happen to be short a stock that is gaining traction within the community (to avoid the same fate as Melvin Capital), or buy and catch the ‘next GameStop’ wave early, before it goes up 10-50x or more more.
An alternative and possibly more fruitful approach would be to filter /r/WallStreetBets by IQ . I surmise that there probably dozens of traders like Guha on /r/WallStreetBets, who have very high IQs and are not only beating the market, but crushing the coemption in a game that is otherwise assumed to be stacked in the houses favor. These smart traders know, or at least have an intuition, of which options to buy, the duration of the option, the strike price, and other variables, and are able to filter out which stocks to hone in on and which ones to avoid. Although is is not possible to actually know someone’s IQ unless you ask (and that is an awkward question anyway) , there are plenty of proxies or characteristics that correlate with IQ, such as writing style and vocabulary, educational background, employment, standardized test scores, etc. that can be obtained from the user’s post history. If someone’s post history mentions having graduated from a top-tier school and or a history of STEM employment, then likely they have a high IQ and thus their trades should be given additional consideration and scrutiny and even copied , as it is possible they intuited a strategy that is otherwise overlooked. .