Options Education : Opinion versus Fact!

admin, 25 June 2013, No comments
Categories: Investing
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The most basic aspect of trading is learning to differentiate
between what is FACTUAL and what is OPINION. If you stay
interested in the financial markets long enough you will
discover that there are a lot of sharks out there who have
become expert at making that task very difficult.

Several subscribers of this newsletter have contacted me over
the last few weeks asking for my opinion of certain promoters
who also advocate Options Trading Strategies. I make it a point
to not comment on other services. However, without mentioning
any names I feel that it is necessary to inform you of some of
the most common and deceptive practices used by some promoters.

One of the great appeals to Options trading is that there are so
many possibilities and trading strategies that can be used to
manage risk. However, most services when promoting options like
to demonstrate the tremendous REWARDS that are achievable.
Although tremendous gain is possible, options are considered
speculative instruments and potentially very risky in untrained
hands. Since an Option gives the owner the right to buy or sell
something for a specific period of time the OPTION is considered
to be a deteriorating asset. Since all options have an expiration date, if all things are considered equal, the closer you get to that expiration date the less that the option will be worth.

There is an abundance of literature available on OPTIONS written
primarily for locating and marketing to the GREEDY INVESTOR. One
promoter who charges over $3,500 for his seminars on Options
Education touts that investors in his seminars earn returns in
excess of several thousand percent per year! He provides and
documents several real time examples and shows how some traders
made a 12,000% annualized return. (Just in case you thought
that was a typo that is twelve thousand percent!)

My statistics teacher in college used to say that “The figures
don’t lie, but liars figure.” Listen Up….because if you don’t
learn how to read the fine print that these deceitful promoters
espouse you too will make those types of returns but probably
won’t be able to pay your rent!

Most traders enter into the financial markets seeking that ONE
home run trade that will permit them to check out of the rat
race. Knowing this FACT deceitful promoters arm themselves with
examples that will lead you right into their arms. Here is a
common example of their con in action:

Let’s say that you purchased an OPTION at $1 per share. On that
very same day the market moved in your direction and you were
capable of selling that option at $1.50 per share. Since
Option contracts are all standardized sizes of 100 shares your
net profit before commissions would be $50. You also would have
established a profit of 50%. This is a great return considering
that most money managers earn 15% a year!

To determine your Return on Investment you only need to divide
your net profit by your initial investment. In this instance
you had a 50 cent profit per share on an initial investment of
$1 per share.

Now the promoters bait the hook…….
Even though your profit was $50, your return on investment was
50%. This is indeed factual. Think of how EASY it was to earn
that return, after all you did it in only one day! So since
there are 365 days in a year, to calculate an annualized return we would multiply 50% times 365. The result is a staggering return of 18,250%. (Now if your stomach is turning by this type of deceit, GOOD!)

I offer you the MATH below:

Buy Price 1

Sell Price 1.5

Profit $0.5000

Gross Profit $50.00

% Return 50%

# of Days 1

# of periods in a year (365 days) 365

Initial $ Investment $100.00

Net Profit $50.00

Annualized Return 18,250%

Now what infuriates me about these promoters is how successful
they are at providing the public with this type of “financial
snake oil!” One promoter in particular has actually written a
best-selling book on options that is filled with these types of
misleading and deceitful computations. Hard to believe but an
18,250% return will barely pay for the price of the book!

Although this is a technical point. many of you have probably
realized that the above example is further complicated by the
fact that the financial markets are not open 365 days a year.
If you take weekends and holidays into account you literally only have 252 days to play with. So the more mathematically oriented con men would offer you the following calculation:

Buy 1

Sell 1.5

Profit $0.5000

Gross Profit $50.00

% Return 50%

# of Days 1

# of periods in a year (252 days) 252

Net Profit $50.00

Annualized Return 12,600%

Hey 12,600% annualized return…sure beats those low yielding

Now, I wish I was making this stuff up, but my mailbox is filled
everyday with variations of these examples. No mention is ever
made of the fact that your profit BEFORE commissions was $50
bucks which is not bad and might pay for DINNER out on the town.

This may seem extremely elementary and basic to many of you.
However, I have seen many extremely successful individuals taken
in by this type of deceit. I think you’ll agree that although
the numbers are accurate they are completely unrealistic and the INTENTIONS of the promoters are what is in question. Nonetheless, you’d be surprised how many $3,500 seminars the above example will SELL.

The financial markets only require one thing of you if you are
to be successful and that is that you manage your risk on each
and every trade. THERE IS NO OTHER SECRET. In my own trading I
must admit that it took me years to learn how to TAKE a LOSS. Once I learned how to lose and accept it as part of doing business my trading dramatically improved. Although I consider this to be among the most profound truths that I have learned regarding trading I readily recognize that it is nowhere near as marketable as promoting 18,250% returns. Or was that 12,600%? After all 50 bucks IS 50 bucks!

Sometimes it is difficult to differentiate between FACT and
OPINION. In those instances I heed the words of the great Yogi
Berra, “You can observe a lot by just looking.” Nuff said.

Next article I’ll get back to LOW RISK trading ideas in these
high risk markets.

Study away…..and remember, let’s be careful out there!

-Harald Anderson


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