The New (Thrash) Paper Article on Options dated 20Aug2009

my take on what's written (in blue)... please feel free to offer your thoughts as well.. thanks in advance..

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Thu, Aug 20, 2009
The New Paper

Forget the fast money

By Larry Haverkamp

I WAS drinking iced tea at a Burger King outlet the other day when a woman sitting nearby showed me the course she was studying: Options trading.

She told me: 'It's like stocks, but you can make money even faster.'
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Options were also featured in last week's issue of The Sunday Times. It isn't easy. You have to learn about delta, gamma, vega and theta.

As the woman told me, the appeal is leverage. You can trade 10 to 20 times your capital, which amplifies the profits and losses by 10 to 20 times. It is life in the fast lane.

this is a factual statement..options is a leverage tool

Futures and structured warrants are similar to options. All are traded on the Singapore Exchange (SGX) but the trading volume is low, almost zero.

Futures is in many ways NOT similar to options... the only similarity is that Futures and Options are Derivatives... but so is a whale and a human...both are mammals... but do we say whales are similar to human beings??? Futures positions can be constucted using Options.. but the 2 instruments have stark differences. Futures prices are NOT determined by option GREEKs.

Structured warrants - a type of option - solve the problem by permitting the issuing bank to act as a market maker. It stands ready to buy or sell to anyone who wants to trade.

It is accurate to state that Structured Warrants are similar to exchange traded options, BUT the one and CRUCIAL difference, is Structured Warrants are offered by issuing banks and the being the market maker can very easily manipulate the price of these warrants, and I opine that they do to the disadvantage of retail traders. Structured Warrants are NOT to be traded by small fish...they are to be AVOIDED at all cost...

That's a plus, but the downside is that issuing banks conceal their fees in the warrant's price. There is no way to know the charges and many traders assume there are none.

This is only but one of the main disadvantanges of trading Structure Warrants..

Another solution is to trade futures and options on the major exchanges in Chicago, New York and London. Commissions are low and the volume is high.

This above is a fair statement...

The big question is: 'Can you make money?'

The same question aplies to any form of investment/trading... it is another trading instrument like any other... employ it smartly, and it gives an equal chance of winning and losing...

Courses, brokers and exchanges say you can but their livelihood depends on your trading. In fact, you can't win trading options, futures and warrants.

Flaw 1: Predicting the unpredictable

The first problem is that fancy terms like delta, gamma, vega and theta won't help if you don't have the correct 'view' of the future.

Is that hard to achieve? After all, prices move in only two directions: Up and down.

While they claim it is easy, I have asked trainers and other experts: 'Show me.'

The author is ignorant... price actions consist of not just 2, but 3 main categories; ie...up, down and stagnant...and it is exactly during a stagnant market that only Options trading offers anyone the chance of making money from the market..

when trading stocks or futures, one has theoretically only 33% of winning...that is when it moves in your desired direction....if price stays stagnant, you have just lost on opportunity costs... options on the other hand, can be deployed to make money n a directionless market...NO other instrument allows for this...NONE...I challenge you to name me one other than options...

Simply predict the price of any stock, index, option, warrant or future's contract for any date in the next 12 months. None has taken up the challenge.

I don't blame them. Markets already include all information in the price. You can outperform the market only if you have special or insider information.

It is hard to come by and may even be illegal if it gives you an unfair trading advantage.

armed with a deeper understanding of options, one can have an edge... only unknown to the uninformed...

The good news is even without fortune-telling or an expert view of the future, you can still win.

All you need is to buy and hold a diversified portfolio of stocks, bonds and property for the long run.

You can't do that with options, futures and warrants, since they are short-term trading instruments. Nearly all expire in a year or less.

There are options on stocks, options on futures, options on indexes, options on commodities, options of properties, options on softs, options on hard, options on soiled panties, options on pancakes, options on anything... the author is an ignorant fool....

options was first created as a hedging tool... it is in its very nature to offer protection to an investment portfolio...

Flaw 2: Zero-sum and worse

this entire section is NOT worth your time reading...it is not relevant to options as a trading tool...

Options, futures and warrants are not assets but promises written into contracts. If you make a short-term bet that the market will go up, an unknown counter-party takes the other side to bet it will go down.

Your win is their loss and vice-versa, making it zero-sum.

When you include the trading costs, it becomes negative sum.

It is like flipping a coin with a friend. You pass money back and forth between each other and the average return is zero.

Suppose a third person - George - enters the room and takes a fee for overseeing the coin flipping. This makes a big difference and the game becomes negative-sum.

You and your friend will eventually lose ALL your money to the middle-man, George. It is only a question of time.

Options, futures and warrants are also zero-sum and become negative-sum when you include commissions. While returns are low - negative, in fact - leverage keeps the risks high.

A better choice is non zero-sum investments like stocks, bonds and property. These appreciate in the long run as the economy grows.

They also have the advantage of paying higher returns for riskier investments. Stocks and property, for example, are more risky and earn higher returns than bonds.

It isn't true for options, futures and warrants where risks are always high while average returns remain negative and produce losses.

This article was first published in The New Paper.