The Blogosphere. Be Careful Out There (Amended)

Amended

The blogosphere is a fantastic place and serves the needs of  millions.  As it gains more and more publishers and readers, its influence grows.  The open question is when bloggers will be given the same respect as other writers – such as newspaper columnists and reporters.

One problem is that the quantity of garbage that's posted is almost beyond belief.  Most contributors try to be honest, but some make mistakes that can cause harm to others.  Some deliberately disperse misleading information in an attempt to make money or further some political cause.  One of the wonders of the blogosphere is that anyone can write a blog and send his/her thoughts out to the world.

Some bloggers write for themselves and have a small audience.  Others are very influential and have huge audiences.  But regardless of the audience, there is no way to control the spewing of nonsense.  Sometimes it's worse than nonsense – it's harmful information that damages those who have no way to know that the mis-information is not true.

I'm sharing my 30+ years experience with you, and truly believe the guidance I offer is helpful.  Your kind comments tell me that I'm succeeding in that regard.

But what is there to distinguish Options for Rookie's from the blog described below?  There is no way for a reader to 'know' who is right and who is wrong when contradictory advice is offered.  Part of the time the disagreement is subtle and may be the result of using an ill-chosen word.  But sometimes the difference is factual.  It's up to the reader to distinguish fact from fiction.

 

***

A recent question from a reader indicated that he believed a married put (long one put and long 100 shares of stock) is superior to owning a call option.  I explained: because those positions are equivalent, neither is better than the other and that when the options are priced efficiently – at expiration – the position disappears, and each provides exactly the same profit and loss – within a dollar or two.  Of course, this must include everything (except commissions), such as dividends collected, interest not earned because cash was invested in the position (this is called the cost to carry), margin interest paid to the broker, etc.  Sometimes one position is more efficient to own because it requires fewer commissions, but that's not considered when we speak of positions being equivalent.

When I asked why he believed as he did (and I'm not certain I convinced him, even after four e-mail exchanges), he gave me a web site as his source.  Sure enough, the following was published in a blog:

[This is from a blog that I will not name.   I'm sure you can find it if you so desire, but what's the point?  It's merely one example of people selling books and courses and newsletters with incorrect information.  It's just another case of buyer beware.

I am amending this post on 5/29/2009 at the request of Kurt Frankenberg, publisher of the blog, Radioactive Trading.  He disagrees with my statements and feels very strongly that the strategy he describes is one that truly benefits those who follow his advice.  I apologize for omitting his name and link to his blog.

I stand by my criticism of the married put strategy, but you can learn more about that method by visiting his blog.


Long Calls vs. Married Puts

Question:

What is the advantage of buying stock with an in the money married put
over just buying the call of the same strike price to start the trade?

[Note: this assumes there is such an advantage, when there is not.]

Answer:
The most powerful benefit is that this arrangement doesn’t allow you to
become overextended. It FORCES a position size that doesn’t hurt too
badly if it goes against, whereas someone wishing to invest in the same
issue with the same sentiment might be tempted to over-trade their
available capital.

[Note: He is saying that if you decide to buy 1,000 shares and 10 puts, you will not be intelligent enough to buy only 10 calls, and that you may be tempted to buy a much larger number.  That's insanity.]

Also, there are adjustments that can be done with the put that cannot be done at a profit with a long call.

[NOTE: An incorrect statement.  There are no risk-free adjustments that can be made to one position that cannot be made with the other.  Why?  Because the positions are equivalent.]

Finally, there is the fact that many accounts cannot be traded with
pure options plays, or that people may own stock as a part of their
compensation plan at work, and these strategies directly benefit those
situations.

[NOTE: a) I have never seen a broker allow married puts and not allow long calls.  b) If you own long stock and want to buy the married put, you can do so.  But the equivalent position is to unload the stock and buy calls instead.  That works because (stock + put) = call).]  

***

In one of his videos he states "The put option is the only risk management strategy that works for all markets." Here is a link to his videos at YouTube.

I hope you all recognize that this statement is not true.  If puts work, then calls always work also – when you make a synthetically equivalent trade.

***

These mistakes are not so horrible that the reader is going to do something stupid.  But this blogger is defending his incorrect statement because his whole premise is that he has discovered a great way for investors to limit losses – the married put.  And guess what? He profits from that idea by sell materials that show readers how to adopt that married put strategy.

I'm not picking on this blogger for any specific reason.  He may truly believe what he says is true.  But that's very unlikely.  Instead, it's just a general warning that not all bloggers are honest and not all are competent.  I suspect most of you already knew that, but the person who sent those email messages is confused and that bothers me.

It's far easier to buy call options and it involves fewer commissions. NOTE: I do not recommend buying call options, but I do prefer it to buying married puts.

Further note:  This post is about blogging and incorrect information – it's not about whether a married put provides a tax advantage in a specific situation.

342

5 Responses to The Blogosphere. Be Careful Out There (Amended)

  1. Les Lammers 05/10/2009 at 6:24 PM #

    Mark,
    You are so correct about blog posts.
    Thanks for the great books.
    Les

  2. roy 05/14/2009 at 4:47 AM #

    Mark
    I am quite new to options trading. We have become involved with a program in the UK that calls itself The Protected Trader. It buys 100stocks (DJIA) at the same time buys a put option 5% above stock price 6month or more out with a maximum Risk of less than 8%.Again at the same time Sell OTM one or two month call Option with 5% or greater premium.
    This appears similar to the strategies put forward in the Blueprint to which I believe you allude in this blog.
    The same person also wrote this below to justify married puts over long calls.
    Aren’t Long Calls and Married Puts the Same Thing?
    Chris Smith actually bought The Blueprint. I’m okay with his review, except he should be informed that:
    1) The Blueprint’s chapters HAVE been revised to name the Income Methods with the traditionally accepted terms, so that part should be eliminated if he wants a current, accurate review and be reminded…
    2) The benefit of the married put at the outset is that it defines risk more readily, in a more understandable way for many.
    A married put is NOT the synthetic equivalent of a long call; it is the synthetic equivalent of a long call WITH that long call having a commensurate amount of capital on deposit in a free interest account. That’s intellectual honesty.
    That is why the time value premium of an OTM call is always higher than the time value premium portion of an ITM put at the same strike. The free interest rate is priced in.
    Folks that want to trade an ideal amount of risk will find that using a married put will do the heavy lifting for them intellectually. They simply decide their risk parameters and use the PowerOptions search screen… no problem.
    At one point, Chris shared with me that he was trading an amount of $5,000 and had a $1,000 gain in the same period of time that I was trading $100,000 and had a $2,10O gain. His implication was that pure options did better.
    I pointed out that it might appear that way on the surface… a 20% gain versus a 2.1% gain… but that after all, his $5,000 SHOULD represent $100,000 of total trading capital because he was risking 100% of the capital that he was betting on each long call, while I was risking 5% of the capital I was betting on each married put.
    In other words, 5% of $100,000 is exactly equal to 100% of $5,000…. by that standard, and by the dollar amount both of our accounts returned, my 2.1%, highly protected gain was greater than his highly leveraged, 20% gain.
    If we’re going to talk leverage, let’s talk leverage. A trade that goes against me costs 5%, the same trade that goes just as sour against a pure options guy costs 100%.
    100% of $5k is the SAME as 5% of $100k.
    RadioActive Trading with a married put ENSURES that a trader, ESPECIALLY a beginner to options or to money management, does not take risks that are too big. Meanwhile, it still affords the trader the opportunity to take dividends, or to play these strategies on the company that he works for when he receives stock as an employee benefit.
    The Blueprint may not be the publication of choice to the seasoned options trader that already understands deep principles of money management, but that’s not to whom it is addressed.
    Mainly, I’ve been trying to benefit the thousands that have been burned by the snake oil gurus in the covered call seminars, OR guys like the fella I met today in a coffee shop… he works for ADBE and gets some of his compensation in the form of purchasing company stock once a quarter, a specified number of shares for how long he’s worked there… for 15% below the current ask price.
    Can The Blueprint benefit this guy and many others in his shoes? You darn skippy it could! He could “bulletproof” immediately with an extended collar and not be crying in his coffee… like this fella was… about his retirement. And it wouldn’t have taken years of experience trading options just to teach him about “Stock Insurance” to simply show him how to bulletproof his stock, and take a little income off it without selling it, even help him “catch” extra money with ratio spreads and such… with NO risk… by selling them against a bulletproofed stock.
    ANYway…this helps answer folks that keep coming up with the same old tired argument: Trading long calls and married puts is IDENTICAL.
    Hogwash. If there wasn’t a difference than why prefer the calls? There IS a difference, and though that difference may to some only be a matter of how to manage them… it’s that difference that makes them a simple choice for the folks to whom The Blueprint is addressed: People that heretofore have ignored or not understood the principles of safe money management. I believe in my soul that it will help those whom it’s designed to help, and perhaps the review could reflect that.
    Mark
    we are trying to learn these strategies to assist with capital accumulation and/or income. Do you feel that they are flawed and if so could you indicate why so that we can understand as it is difficult to get independent information.
    Regards

  3. Mark Wolfinger 05/14/2009 at 7:32 AM #

    Thanks for the lengthy reply.
    It will take time to answer and I’ll post that answer as a blog post tomorrow morning.
    Regards,
    Mark

  4. roy 05/14/2009 at 7:47 AM #

    Thanks Mark.
    Not expecting you to do it for us although any guidance much appreciated.
    It’s just that when you start of on a process of study/education to improve our financial status the difficulty is that we dont know what we dont know. We try to have a healthy scepticism to certain claims but we hope that within the strategies put forward there is reasonable kernel of truth. So if claims of Married Put and selling Calls strategy producing 3-6%mth are unfounded we do not really mind. As long as somewhere around 1%per month (or annual equivalent) is feasible once adept in the strategy then we would be comfortable with that-provided that the capital preservation aspect of the strategy is valid. We have up to £500K available but that forms a significant part of our assets.
    Many thanks for you assistance
    Regards
    Roy Mckenna

  5. Mark Wolfinger 05/14/2009 at 8:52 AM #

    Reply made in today’s post: 5/14/2009