Criminal Minds, Bernie Madoff, and Options Trading

Please don't get the wrong impression from the title.  There is nothing wrong with options trading.  In fact, as you know, I strongly believe it's an effective and efficient method for investors to reduce risk when investing in the stock market.

But 'options' have a bad reputation in some circles – and there's no good reason for that.  Bad publicity resulted when certain individuals caused financial catastrophes by gambling, and then losing, other people's money.  Remember the rogue trader (Nick Leeson) whose losses resulted in the failure of Britain's venerable Barings Bank in 1995? (Was it really that long ago?)


And then there's Bernie Madoff.  There are no words to describe his despicable actions, but he does bring to mind a TV show:

CriminalMinds

His ponzi scheme was founded on a sensible option strategy – a variation of the collar.

Options are versatile investing tools and there are a good variety of strategies available to the option trader.  I recommend collars for those who are very new to options and want to preserve the value of their investment portfolios.  It's a method worth learning.

In summary, collars involve stock ownership, coupled with the writing (sale) of a covered call option (to generate cash) and the purchase of a put option (using the cash from the call sale).  The put acts as an insurance policy, guaranteeing a pre-determined minimum value for the investor's assets.  That minimum allows investors to avoid painful losses when markets tumble.

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2 Responses to Criminal Minds, Bernie Madoff, and Options Trading

  1. MartinGS 06/04/2009 at 2:35 PM #

    What is interesting, well maybe not to the people who were taken, was not that he was claiming high returns, 1% per month, but the serial correlation of the returns.

  2. Mark Wolfinger 06/04/2009 at 2:49 PM #

    Too few people understand investing well enough to question those -too good to be true – returns.
    Those who did complain to the SEC were ignored.
    When a fund comes recommended, when it runs by someone personable, it’s too easy to be trapped. That’s how a scam works. Very sad.