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Author: MDCigan Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 11006  
Subject: "Free money" Date: 12/7/2001 2:53 AM
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http://aol.multexinvestor.com/AskTheAnalystForm.asp?&nd=1207

http://www.poweropt.com/

Cmon everyboy, come on down and pick up the free money. It's lying everywhere just waiting for you. Ugh. This is the sort of thing that I think gives options a bad name, and why for many they are not considered part of a prudent investor's portfolio.

I for one, think selling put options on a stock you'd like to own at the strike price of the option can be a very effective strategy (especially if IV is high) as a means to lower your effective average cost basis on the stock. But to portray it as "free money" is intellectually dishonest and borders on the ridiculous.

While I'm ranting here, I've just frankly been amazed at how dishonestly options are portrayed, both by longs and shorts. Some option sellers (a website I checked out and a free newsletter sent to me) speak as if there is all this free money just waiting for you to collect. Many longs (usually short-term unhedged speculative directional) always speak of the tremendous leverage, get 200%, 300% or more on a single trade, and the most you can lose is your initial investment. I've always found that statement, "you can only lose your initial investment" to be a quite absurd one. I'm not sure what the positive of that is. That's a 100% loss of capital.

I've also been somewhat disappointed with some of the "expert" advisory services. I got a free trial to Schaeffer's service and frankly I'm not impressed. His core strategy is speculative call and put buying (no spreads to reduce risk) on stocks with good technicals and contrarian sentiment. IMO, that's a pretty crappy strategy over the long term. Why not either bullish or bearish debit or credit spreads depending on volatility? Most of the "experts" seem to focus their recommendations on speculative call and put buying, perhaps straddles, and that's about it. I'm not gonna pay big bucks for that. I can do that myself.

I don't understand why any of these guys are not analyzing the options field for attractive opportunities based on volatilities and skews. Grahamified posted an example of a ratio spread trade awhile back that had a profit zone from 0 to like 70% over the current stock price. Peter has posted some examples of excellent calendar spread or backspread opportunities. That's the kind of trade I'll pay money for and requires effort to dig up. It just seems to me that with trading costs coming down dramatically (1.50 a contract at OptionsXpress) and the off-floor trader becoming more sophisticated, there is no reason the off-floor trader cannot trade more like a floor trader in terms of strategies (of course you don't have the bid-ask spread advantage they do). Calendar spreads, ratio spreads and backspreads, butterflies, etc. I know some people may be skeptical, but the more I examine the various experts, it seems like Fontanills is the only guy directing the individual trader in this direction while everybody else wants to just crudely bet on stock direction with short-term calls and puts.

Oh well, I've rambled enough. Off my soapbox.


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