Beware of swindlers

I don’t know the difference between deception and criminal deception - you’d have to ask a criminal attorney - but these hypsters feel like criminals to me.

These swindlers publish stories that are so outrageous, that I am amazed that anyone on the planet could fall for it. Or is that just me being naive? Tell a good story, repeat it a few times, and the customers flock to you. Maybe ‘flock’ is an exaggeration, but people come to you, begging you to take their money.

There’s nothing special about the options trading business. The liars and cheats are present in every business, dreaming up scams to separate people from their money. It makes me angry.

Here’s one example, chosen via search:

Do you generate less than 20% profit every month in your trading account?… If you answered yes, what I’m about to share with you could change your life forever…

That profit can vary but if you do it right you should be able to generate at least a 20% profit each month – yea that’s right, I said each MONTH.

I don’t know whether to laugh at the nonsense or cry for the victims. He says you SHOULD be able to generate AT LEAST 20% EACH month. And how do we accomplish this miracle: By writing covered calls. If he were to say that it’s possible to earn 20% when things go your way for an entire month, I’d agree with the statement. But ‘should’ and ‘each’? Has he never seen a down market? Does he believe that VIX is always 100?

It’s beyond belief. But I’m sure he sells his costly software and courses to the gullible. $1,000 invested for one year, growing at 20% per month compounded, becomes $8,900. Do it for six years and you’d earn one half-billion dollars.

Sure, I omitted commissions and assumed taxes could be paid with other funds, but here is someone who would have you believe that this is the minimum result you SHOULD anticipate. How can making these statements not be against the law?
 

I recently claimed that a skilled options trader – someone who exercises good risk management skills has a reasonable chance (but it’s not a cinch by any means) to earn 20% in one year. Mark, who blogs at option pit recently held a webinar through the option club.com and suggested that 13% is a reasonable annual expectation. So who is to be believed? The 20% per month boaster, or two experienced traders and teachers?

The Banks also play the game

It’s not bad enough to be cheated by random individuals. What chance does the naive person have when the banks openly overcharge for structured products- or options in disguise. One simple example is described by the Amsterdam Trader.

The old profession of market making may be dead, according to All Options’ spokesman, but with a little creativity it’s fairly easy for banks to invent something new. Let’s have a small look what Royal Bank of Scotland is bringing us for fancy structured products.
 

The rocket scientists at RBS have invented a basic option construction (“short atm put”) and labelled it with a fancy name (“discounter”). As of October 4th, they are actually selling this structured product to the retail investors. The marketing department didn’t only create the name Discounter, but also the wonderful slogan (“buy shares against a discounted price”). The product isn’t just comparable with a short put position, it is exactly the same thing. When the underlying share price goes up, you pocket the short put premium. If the prices drop, you’ll end up with buying the shares (and still get the option premium of course). You could also call it covered call writing.
 

First of all, the retail investors are fooled into buying repackaged crap – there’s an adequate Dutch saying for that (selling turnips as lemons). Apart from trying to sell retail investors ordinary short puts, this RBS product is daylight robbery. They are charging an outrageous 2 percent fee per year, for basically nothing. Retail investors hand over their hard earned cash into the greedy hands of RBS, and RBS is charging them for it. Selling a bond to the bank and having to pay for it. If RBS goes bankrupt, you’ll lose a part of your investment. Nothing wrong with structured products, you always end up overpaying but as long as it’s tricky or impossible to do-it-yourself it’s fine with me. This one, however, is a bridge too far.

We’ve recently had a lot of attention for financial institutions cheating on their customers, but they haven’t learned their lesson and prove unreliable. Cheating clients and getting away with it, at least for the time being. Investors should just buy the shares, and sell the at-the-money call if they wish to replicate this product. Stay away from the “discount” swindle.

Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.