- Markets & Risk Newsletter
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The Wizard of Oz and Stock Options - Stock Options Strategies Involve Hidden Risk Among serious investors, it is fundamental that stock market investments carry exposure to risk. Maybe lots of risk, maybe a little, but as we have seen in the past six months even traditional blue-chip stocks can be volatile. But for some there is a Land of Oz where the Wizard knows the secret to playing the market with guaranteed results. Among the myriad ways to invest in the market, perhaps few are as prone to get-rich-quick schemes as options trading. Google "stock option strategies." You will get something like 17,800,000 results. If you peruse the stock-option-secrets sites, a common theme emerges. By mastering a complex system of checks and balances, you can reap enormous profits whether the market goes up or down. Either way, you win. The risk has been removed. Compared to this win-win approach, the old-fashioned way of carefully investing in a promising enterprise is hopelessly quaint. The catch is that unlike in the Wizard of Oz, there are no free rides. The secrets to option profits must be purchased from the experts, and it's a thriving industry. Here are a few choice schemes that, for a price, claim to eliminate risk. "Reversal" Supposedly this is successful when investors are pessimistic and the prices for put options are larger than the prices for call options. Here's how it works. The stock price for ABC (a non-dividend paying company) is $50. A three-month 50-strike call can be purchased for $4.75 while a three-month put at the 50 strike can be sold for $5.25.
If you sell 100 shares of ABC short and collect $5,000, then buy a 50 call for $475 and sell a 50 put for $525, you have created what is called a reversal, and you will make a $50 profit, guaranteed (except for commissions). You'll also collect interest on the $5,000 cash in your account. The reversal strategy supposedly guarantees that you will make money no matter which way the stock goes. "Conversion" A strategy that involves buying stock, selling calls, and buying puts. In order for this to work, the time premium of the calls has to be greater than the cost of the puts as well as high enough to cover the interest on the long stock for the designated time period. Details are available at a price.
"Buying underpriced options" Of course, you could argue that buying anything underpriced and then selling it at a higher value is a good way to make money. Finding underpriced options is simple in theory, but according to one options trading website, this takes strategies and techniques that one can only purchase from an expert. They say that the secrets pay off. One online resource states that a $1,000 investment returned $137,260.00 in 2005 and 2006. In just four minutes per day, you can generate a six-figure income using proprietary strategies that have unlocked the bank vaults of Wall Street. Is the stock market headed to the basement? It doesn't matter; buy and sell options and reap big profits.
The Fine Print Like the cancer warnings emblazoned on cigarette packs, each get-rich-quick website has disclaimers stating that investing is risky and that there is no guarantee of success - you may in fact lose your shirt. And there's the rub: at the end of the day no one can eliminate risk. What the successful investor can do is to identify and manage risk. To that end using options can be very good way to hedge exposure. However, to effectively do so, you need to be well-informed and have access to the right tools. It also helps to remember that if you have dreamed up a new angle to make quick profits, some other guy has probably done so as well. For information on powerful risk-management tools that allow you to track and measure the risk of global equities, equity options, and complex option strategies, contact PortfolioScience today. |
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