Options hype artists and their victims

Looking through my e-mail archives I found this message from 2009. The story is so sad that I wanted to share it. When we fall for the hype, or when we get trapped by any good salesperson, whose fault is it?

I understand that the villains are present in most businesses, but when it comes to options trading I see all the advertisements and the impossible-to-fill promises. And it hurts. Too many people dismiss options with a ‘not interested’ comment just because of all the bad publicity associated with options and rogue traders.

Mark. I haven’t done an options course since I went into debt by $6,000 – one year ago. The course presented a lot of info about trading options, but did not teach me how to trade!

Currently, I am a member of XXXXXXXX Trainer community. I have not yet made a winning trade using his system. In fact, I do not yet fully understand how to use it.

Lastly, Mark, I have a small cash account under $5,000 and am pretty much restricted to buying calls and puts. Most of my trading, is part of my education process, and I understand that, I am not making a living at trading just yet.

I welcome any and all assistance in my learning process. I turn 67 next week and have virtually no financial assets for a retirement. But, I am confident I can create a retirement income through trading, and eventually build financial independence and be supported by my trading business.

It makes me want to cry. However, he believes he can earn 1,000% return – every year on his $5,000. There are no words that I can find to respond to that impossible dream.

A man in his early retirement years has almost no savings, and spends more than half of it on iron condor lessons. If that’s not bad enough, he apparently did not learn much that was useful.

Failing to learn the lesson, here he is again, taking another training course. Again he does not ‘fully’ understand the training and has made ZERO profitable trades. How is that possible?

He is still optimistic and plans to pursue his dream of making a living from his trading. Now that he is only buying options, he basically has no chance. What a sad story. I wonder if this is truly as sad as it feels to me, or if this person is just one of those people who are born to be fleeced?

I’ve always had total disrespect for those who give options a bad name by enticing people to spend many thousands of dollars for information that can be learned at zero cost. Some mentors and coaches are worth every dime. But how is the inexperienced novice supposed to tell the difference?

My correspondent is in very bad shape. Perhaps gambling is his last best chance to survive. But I wish something could be done to get the unethical crowd out of the options world. I know that will never happen.

What hurt most was that I could not offer anything useful to this person. The truth is that options trading is not for everyone, and he is a prime example of one of those ‘I cannot trade options’ people.

932

24 Responses to Options hype artists and their victims

  1. rick f. 03/23/2011 at 7:10 AM #

    Oh how true.

    I listen to Bloomberg Radio driving to/from work on XM radio. Many of their commercial blocks are full of hucksters — you know, “what if you could trade for 15 minutes a day?” Another firm says “we couldn’t say it if it wasn’t true” in describing its ‘program’s success. Another guy says he made millions in 2009 and 2010 using options — well, yeah: anyone who just picked a stock and went long could have done well during that time, too.

    But there’s always someone pandering to the masses offering a quick fix and promises of hope for instant riches. IMHO that’s no different from full-service brokers offering “Wealth Management” services — which generally means transferring your wealth to theirs. 🙂

    • Mark D Wolfinger 03/23/2011 at 7:59 AM #

      Rick,
      Thanks for sharing. I like your definition of wealth management.

  2. Wayne 03/23/2011 at 9:49 AM #

    Mark,
    Stories like this are very common these days. It takes a humble and disciplined heart to learn rather than spending “many thousands of dollars for information that can be learned at zero cost”. But from time to time when people asked me how I learned about options, I said there are so many free webinars, podcasts out there, with tradeking, etrade, schwab, OIC, etc, etc….so many out there. I showed them all the links; but they seem to always want take a “real” course instead.
    Then just last week I went to my accountant to do my taxes. She said that nobody, nobody, not a person in all her years in business makes money in options. She certainly sees stock/options as such very extremely high risk investment. Then she asked me am I taking training courses? I said I only made a small profit (last year), how would it make sense to be spending thousands of $ in courses if you’re only making a small profit. She said that’s what people do. Then she was describing many many horror stories about how people lose big.(In 09, people were losing $60,000 , $70,000, and previously the burst of the Internet bubble in 00, etc.) Actually, from her more than anything else, she reminded me how risky options can be. In her statement that nobody makes money in options, I think she refers to the long term. I mean, when I buy calls and puts, actually it’s always very possible to make some profits here and there (and I did), but it just takes one loss, a big one, to earse all the early wins. So, my accountant was probably referring to the long-term prospect if one is not disciplined.

    • Mark D Wolfinger 03/23/2011 at 11:30 AM #

      Wayne,

      The first thing I would ask the accountant is:

      How experienced and sophisticated were these investors who lost money
      Were they making their own trades or following the advice of a newsletter
      Were they buying options or using a limited loss strategy
      Were they managing risk, or just gambling

      Sure the horror stories are out there.
      True, not everyone can make money with options. It requires knowledge, a skill set and personality traits that not everyone has.
      But this is true: People believe they can make money trading – per my example in the post – when in reality they never had a chance.

      To buy/sell options requires such specific talents and the ability to time markets that it amazes me that anyone – other than successful (proven track record) traders who reply on technical analysis. I believe – for my comfort zone – that people who buy/sell options are gamblers. And they need a huge edge to win the game. I prefer higher probability trades with limited risk and limited rewards.

      Regards

      • Robert D. 03/23/2011 at 8:52 PM #

        Mark,

        Regarding your comment:

        “I believe – for my comfort zone – that people who buy/sell options are gamblers. And they need a huge edge to win the game. I prefer higher probability trades with limited risk and limited rewards.”

        I’m guessing that you feel differently about buying DITM options for leverage in directional trades?

        • Mark D Wolfinger 03/23/2011 at 8:58 PM #

          Robert,
          What I meant was: People who buy options as a play on the market direction and timing of a specific stock are gamblers.

          When making adjustments to existing positions – when reducing risk – when making positions safer and less likely to result in a large loss, then buying options is one of several very good choices.

          My preference in those situations is NOT to buy DITM options. Why? They reduce delta risk, but do nothing to reduce the real danger – and that’s the negative gamma (rate at which delta changes). I don’t mind owning options when they are acting as insurance to protect me from a big loss. That is nothing remotely related to buying options as a speculative play.

          I’m sorry for the confusion and I hope this clarifies my stance on this issue.

          Regards

          • Robert D. 03/23/2011 at 9:21 PM #

            Mark,

            Thanks for your reply, but I think I was the one who wasn’t being clear. I was referring to DITM options as a substitute for stock in swing trades. A couple of weeks ago you responded to a post on this subject, and I got the impression that you thought it was a good idea. Or is this true only in certain cases? (Although your reply addressed calls, I’m assuming that buying DITM puts would function as a substitute for shorting the stock.)

            Cheers.

          • Mark D Wolfinger 03/23/2011 at 9:55 PM #

            Robert,

            Yes, DITM options make an excellent substitute for stock for swing traders. That’s true whether you buy puts or calls.
            However, I want to clarify – I agree with you that is only when BUYING. They make very poor substitutes when selling.

            I’ve posted on this topic more than once (including last week), so am on record.

  3. Wayne 03/23/2011 at 11:10 AM #

    Hi everyone,
    After sharing with you about the accountant, I have a question about taxes, and I know nobody here can give tax advice, but just want to ask if you know.

    Is it really true that profits from indices (i.e. my IC with RUT positions less than one year) can be taxed as 60% long-term gain & 40% short-term?

    Actually, do you think I need to find accountants specialized in option trading, if there are these people? Not just any accountant can handle index trades? Any recommended list?
    Wayne

  4. Mark 03/23/2011 at 12:27 PM #

    Was this man in the process of signing up for Options For Rookies Premium?

    If so, I hope you talked him out of it.

    • Mark D Wolfinger 03/23/2011 at 1:52 PM #

      Mark M,

      This is a two-year old letter.
      No he was not trying to become a member, nor would I want to contribute to his misery.

  5. Wayne 03/23/2011 at 1:07 PM #

    Mark,
    I want to ask, when I set a limit order to buy back my IC, is it usually easier to get a fill early in the morning than later the trading day? If so, why?
    Wayne

    • Mark D Wolfinger 03/23/2011 at 1:54 PM #

      Wayne,

      Trying to buy back both sides of the iron condor is a single transaction is a poor idea – unless you are willing to pay a good (for the person taking the other side) price.

      You will find that it is easier to buy one side at a time.

      Timing depends on many things. I doubt that time of day is significant in the vast majority of cases.

      • rluser 03/23/2011 at 6:23 PM #

        I agree and disagree with Mark at the same time. I can do that. 😀

        The market is too complex to make sweeping statements about ‘early’ or ‘late’ being better for those spread purchases. Even so, there is usually a bit of extra price volatility at the open, and those swings may be sufficient to get you filled. If the order is left on until the close you might benefit from any volatility that happens there, too. Mornings have been very good to me in recent months for RUT, but perhaps that is just the luck of the draw. As Mark remarked the other day, you can’t get filled if you don’t have an active order.

        Perhaps Mark has more to say about the unwinding of the IC trade. I do not disagree that getting filled on one side at a time is usually easier than getting all legs at once, but today my order to dispose of RUT APR 730/740/850/860 was filled at 2.15, about .10 off the midpoint: a fill that pleases me immensely. I suspect (but do not know) that closer to expiration, less volatility in the market, a larger delta for my IC, or the body being wider would have made it much harder to get filled on 4 legs at once.

        • Mark D Wolfinger 03/23/2011 at 7:15 PM #

          RLU,

          When you are willing to pay $2.15 (or is 2.15 supposed to be the time? I did not check the prices. I have been far too busy to pay any attention to the market) to exit an iron condor – then each side had value and you don’t want to get legged by being filled on one side.

          However, if you are paying $0.80, then you cannot be too far off base bidding $0.30 to $0.35 for each side – and then raising the bid for the other side – once one side is filled.

          Right now I’m bidding 15 cents for some Apr put spreads. Don’t expect fills, but still have order in place. I bought some Apr calls spreads the same way on the decline. Sitting (day) orders.

          • rluser 03/23/2011 at 10:47 PM #

            Yes, each side had a quite a bit of value and the whole was close to delta neutral.

          • Mark D Wolfinger 03/23/2011 at 10:58 PM #

            RLU,
            And that’s just not the best time to take the leg.

  6. rluser 03/23/2011 at 6:47 PM #

    Ah.. I meant to ask my own question.

    Once upon a time, Mark, you suggested that a reader unwind both sides of the iron condor whenever it was appropriate to remove one side. Simplicity is a virtue.

    I am not doing that. Presently I am short a number of OTM put spreads and could use some ideas about how to characterize the risk the represent to me. I have some rules of thumb I use for portfolio delta and gamma (as well as other greeks), and the maximum value of the spreads is clear.

    Perhaps you can provide some hints on how to compare the risk of these particular points to the overall risk in the portfolio. I am hoping your experience can help guide my ‘what if’ scenarios and add to my rules of thumb that I use.

    Thanks.

    • Mark D Wolfinger 03/23/2011 at 7:27 PM #

      RLU,

      I don’t recall saying that. But I do cover one side cheaply, and then carry the other side naked short. I now bid more than my usual ‘low’ price to exit, but I don’t chase it and I do not automatically cover.

      The greeks help, but the best picture of risk is represented by the graphs. You can see the loss at various price ranges. With puts, you should anticipate even larger losses due to an IV surge. To me, I don’t need those extra dollars when I’m making money. And when losing (that’s when the market is moving), it’s far too dangerous to have added risk.

      Recently, I’ve taken the stance that when I’ve made a good profit, it’s good to exit. Please understand, I believe that the original entry price is irrelevant when exiting. I don’t strive for a specific dollar profit or percentage of premium collected. I exit based only on how much it costs and just how much exposure I have.

      I’ve been paying 40 cents per side to exit – when I can do both at once, and there are 3-4 weeks of life left in the options. I know 80 cents is a lot for OTM options. I also know that I would rather exit and open new 90 day trades at a premium of about $3.00.

      It’s difficult to remember, but my goal is to steadily grow my account, and not have huge wins coupled with larger than necessary losses. Other traders have different goals and other ways to manage risk. In my opinion, there is just a price after which it does not pay to seek more profits. This is a treacherous world, and I’d rather be out two or three weeks early and open a smaller quantity of 90 day positions. It’s just less risky.

      OTM spreads represent low probability risk. If you want to play the mathematical odds, then don’t cover. But to me, I don’t want to be there if the Black Swan appears. I’ll pay up for safety, knowing that the tails of the curve are larger than they appear in normal distribution curves.

      Regards

  7. dave Appel 03/23/2011 at 7:40 PM #

    Hi Mark,

    I do agree it is sad when people swindle others most of all but, this story about a 67 year old man being conned for more than his account was worth is really really sad .Most of the time good money management and options trading can be learned from some good simple books such as yours and honestly some of the better internet articles. I do agree that some trading courses are good but those are very hard to find. Thats honestly why I appreciate you and this site some much !

    Dave Appel

    • Mark D Wolfinger 03/23/2011 at 8:36 PM #

      Dave, Thanks.

      The truth is that the hypesters charge so much cash, that they do not need lots of customers. 200 hundred per year, and they earn $one million.

      On the other hand, I’m asking $37 per month and cannot get enough subscribers to meet my monthly costs. How about that?

  8. Dana 03/23/2011 at 10:40 PM #

    Mark, how do use the VIX in trading calls and puts? Or can you?

    Dana

    • Mark D Wolfinger 03/23/2011 at 10:57 PM #

      Dana,

      You can use it, but with a bit of discretion.

      In general, implied volatility (that’s what VIX measures) rises and falls at similar rates in ‘all’ stocks and other equity indexes. Obviously there are going to be differences, but when VIX is moving one way, it’s fairly safe to bet that IV for a given stock is moving in the same direction. [If there is a news event pending, that changes the situation]

      It’s your expectation for how VIX will move that is playable. If the trend feels as if it will continue – or reverse – direction, then you have a good hint as to whether IV will rise or fall.
      It’s not exact. It’s not entirely scientific because it’s your opinion that makes the final decision.

      If you plan to buy options or own any spread with positive vega, the you want VIX to appear to be bottoming or heading higher. If you plan to sell vega, then you want VIX to appears to be falling.

      That’s how I have used it over the years. I had much more confidence when doing that long ago. The behavior of VIX is more erratic these days. Perhaps that’s because the whole stock market has changed from an investment arena into a gambling casino.

      Regards