Why OPTIONS?

What do you prefer - a business where you have a 10% chance of making something, potentially scoring big, or a business with a 90% chance for consistant smaller incomes?

The Options Secret

For years the Professional Trader in the market had a closely guarded "TRADE SECRET". Well they still do, for very few people go through the trouble to learn about the markets - they just want to trade.. (Plus on top of that every once in a while a hedge fund blows up in spectacular fashion, shying would be traders away from this method).

It is not so much that the market is keeping it a secret, it is more in the way that this method of trading is being promoted. What is the saying: "IT TAKES TWO TO TANGO"! For EVERY transaction there are two parties involved - the buyer and the seller. If the buyer makes money, the seller loses, if the seller makes money, the buyer loses. It is that simple. Trading is a zero-sum game! If someone makes a windfall, then someone else (or many someone's together) lost a windfall! It is not possible for everyone to be a winner - in trading, there are the same amount (in monetary terms) of losers as there are winners!

So what the market did - and they still do - is they ONLY PROMOTE the winner! They say absolutely nothing about the loser. No one speaks about the losers! The market will tell you about this guy that invested $1,000 and six weeks later walked away with $10,000. You open Facebook and find this advert - "Invest as little as $200 and make 1000's of dollars in return!" And it is accompanied by this self confessional video - "Hi, my name is Jim, and you are probably in doubt about this opportunity. Well let me tell you. I was as well, very much so, but I decided to give it a try, $200 is not that much..." And Jim will continue to tell you how he, very much in doubt, took a chance and he couldn't believe his eyes when four weeks later he received his first paycheck of more than $1,000 and since then the money kept rolling in...

Well for Jim to have bought something for $200 and banked $1,000 four weeks later, someone had to sell something to Jim and lost $800!! But that party is not part of the advert - that party does not feature, no one talks about that party - that party is just missing! (To say the least - that party, the losing party, is the party so feverently promoting this business. They are the guys selling you this fantastic trading vehicle! One has to ask why? Why are they so eager to lose all this money - eager enough to spend 1000's of advertising dollars to get you to invest and help them lose even more???) Yes, we are talking about an investment in options here - but it is a very one-sided look at options. And many many people fall for this!

This is how Alan Parry got into the options trading business. Alan Parry was in IT. And one day one of his mates came bragging how he invested ZAR20,000 with this broker, six weeks ago, and how he just received his paycheck of ZAR120,000! And so Alan went to the same broker. And invested ZAR25,000. And waited and waited.. And in the end started enquiring and when finally he got hold of the broker he was told "Oh that! That option expired worthless, you lost your investment. You knew the risk, I thought you knew, you want to try again?" - that is where Alan Parry started - he got burned, but he did not leave it there. He started investigating what happened here...

Probability to Win

The fact is..- there are Option Sellers and there are Option Buyers. The ODDS are stacked hugely in favour of the Option Sellers! Every once in a while though, one Option Buyer makes a windfall profit, but for most of the time the Option Buyer loses it all. However the market doesn't talk about them - the losers. They only tell you about the one in a 100 guys that made the windfall profit!! Imagine a business where the Broker collects $1,000 tickets again and again and again! Yeah, once in a while he has to pay out on one of those, but even then with those rare cases he is able to sell his losses onto someone else!

Look at this picture: Of the 17.6 million options on this specific day, with a total value of $14.5 billion, 85% expired worthless! Did you get that? EIGHTY FIVE PERCENT = 85% of these options expired WORTHLESS on this day!! In 85% of the cases, the Broker kept the money paid to him. For the remaining 15% of the options, someone - not necessarily the Broker, had to pay out. You will hear about these guys - the ones being paid out, you won't hear nothing about the losers!

It is not rocket science. The PROBABILITY favors the Broker, the seller of the option, who collects a premium and keeps the premium. All that remains is to carefully manage the risk with the losing cases.., but those are few, and you have a profitable business!

Insurance Business

Options are Insurance Policies. They are risk vehicles, designed TO REDUCE the risk in the futures markets. They are not instruments that increases the risk, they are used to DECREASE risk. This is not what the market will tell you! The market will tell you that selling options is THE MOST RISKY of all investment vehicles. They will tell you that SELLING OPTIONS are ONLY meant for the Institutional Trader, the Professional Trader with huge financial backing!! The market will very much try to convince you to stay away from selling options, to only be a BUYER of options!

WHY?

Well it is very simple really. Trading is a zero-sum game. For the Institutional (Professional) Trader to keep on winning, they need many many people to keep on losing. Unfortunately people who loses tend to stop trading, therefor the market needs a constant flux of new traders to enter the market to lose. If not, the Institutional Trader runs out of losers and then they cannot keep on winning.


How many Insurance Companies do you know off that keeps on paying out, that are net losers in the market? Think about Insurance Companies for a moment. Are they generally big companies, with lots of money, or small companies, that only exists for a short while, until they have paid out enough people and then they disappear? Options are insurance policies that the Insurance Broker write to clients to reduce their risk. For most of the time, the risk does not realise, the investor is happy that the risk did not materialise, the premium he paid for the insurance poilcy is happily forfeited. The Insurance Company grows rich on these insurance policies. From time to time they have to make a payout and they do - but those in general are small in comparison to the many insurance premiums they gather.

Think about the Casino. They do make payouts from time to time. But the house always wins - why? Because the probability is stacked in their favour! In the case of the Casino, only slightly. In the case of the Insurance Company - hugely so...

SO WHY OPTIONS?

  • Options are RISK REDUCING instruments. For the same movement in price in the underlying futures, an Options position carries less risk than a corresponding Futures Position
  • Less risk, means the futures has to make a bigger move to threaten your position. Bigger move means you have MORE ROOM TO BE WRONG!
  • More room to be wrong, gives you the opportunity to step away from the market, let it run its course
  • Doing it the right way, the PROBABILITY TO WIN is stacked in your favour. The house always wins because the probability is stacked only slightly in their favor.
  • By carefully managing your risk you are afforded a profitable trading business
  • You are GETTING PAID to trade. You are being paid a premium which you keep - the principle of using other people's money
I don't know about you. But I am not a professional trader! I have a daytime job; I do not, and cannot afford to, trade the whole day. I've got other stuff to do. Maybe you are retired. Your whole life you practised law, or medicine, or maybe you were and engineer, or a teacher, or a technician of some sort. You never learned all the tricks the Professional Trader learnt. By REDUCING THE RISK, you are able to enter the market, then step away from the market, let it do its thing. You don't have to watch the market all the time - you are able to step away and do whatever it is you are doing. You only need to monitor the market once a day at a time that suits you, calmly decide whether you stay in or get out, or how to handle what the market threw at you. You have a business where you can trade PART-TIME at reduced risk and still manage your business!!

It is not to say there is NO RISK! Of course there is risk. You have to learn to manage that risk if you want to be successful in this business. You will need certain skills to be successful. BUT, if willing to learn, Options offers you a way to level the playing field and make a success out of trading.