Options Education : Opinion versus Fact!
The most basic aspect of trading is learning to differentiatebetween what is FACTUAL and what is OPINION. If you stayinterested in the financial markets long enough you willdiscover that there are a lot of sharks out there who havebecome expert at making that task very difficult.
Several subscribers of this newsletter have contacted me overthe last few weeks asking for my opinion of certain promoterswho also advocate Options Trading Strategies. I make it a pointto not comment on other services. However, without mentioningany names I feel that it is necessary to inform you of some ofthe most common and deceptive practices used by some promoters.
One of the great appeals to Options trading is that there are somany possibilities and trading strategies that can be used tomanage risk. However, most services when promoting options liketo demonstrate the tremendous REWARDS that are achievable.Although tremendous gain is possible, options are consideredspeculative instruments and potentially very risky in untrainedhands. Since an Option gives the owner the right to buy or sellsomething for a specific period of time the OPTION is consideredto 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 writtenprimarily for locating and marketing to the GREEDY INVESTOR. Onepromoter who charges over $3,500 for his seminars on OptionsEducation touts that investors in his seminars earn returns inexcess of several thousand percent per year! He provides anddocuments several real time examples and shows how some tradersmade a 12,000% annualized return. (Just in case you thoughtthat was a typo that is twelve thousand percent!)
My statistics teacher in college used to say that "The figuresdon't lie, but liars figure." Listen Up....because if you don'tlearn how to read the fine print that these deceitful promotersespouse you too will make those types of returns but probablywon't be able to pay your rent!
Most traders enter into the financial markets seeking that ONEhome run trade that will permit them to check out of the ratrace. Knowing this FACT deceitful promoters arm themselves withexamples that will lead you right into their arms. Here is acommon example of their con in action:
Let's say that you purchased an OPTION at $1 per share. On thatvery same day the market moved in your direction and you werecapable of selling that option at $1.50 per share. SinceOption contracts are all standardized sizes of 100 shares yournet profit before commissions would be $50. You also would haveestablished a profit of 50%. This is a great return consideringthat most money managers earn 15% a year!
To determine your Return on Investment you only need to divideyour net profit by your initial investment. In this instanceyou 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 was50%. This is indeed factual. Think of how EASY it was to earnthat return, after all you did it in only one day! So sincethere 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
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 successfulthey are at providing the public with this type of "financialsnake oil!" One promoter in particular has actually written abest-selling book on options that is filled with these types ofmisleading and deceitful computations. Hard to believe but an18,250% return will barely pay for the price of the book!
Although this is a technical point. many of you have probablyrealized that the above example is further complicated by thefact 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:
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 yieldingMUTUAL FUNDS!
Now, I wish I was making this stuff up, but my mailbox is filledeveryday with variations of these examples. No mention is evermade of the fact that your profit BEFORE commissions was $50bucks 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 takenin by this type of deceit. I think you'll agree that althoughthe 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 areto be successful and that is that you manage your risk on eachand every trade. THERE IS NO OTHER SECRET. In my own trading Imust 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 andOPINION. In those instances I heed the words of the great YogiBerra, "You can observe a lot by just looking." Nuff said.
Next article I'll get back to LOW RISK trading ideas in thesehigh risk markets.
Study away.....and remember, let's be careful out there!
Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com a leading online resource of Options Trading Information. He writes regularly for financial publications on Risk Management and Trading Strategies. His goal in life is to become the kind of person that his dog already thinks he is. http://www.eOptionsTrader.com.
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