18 September 2009

Options Spuikers Under The Spotlight

Choice Magazine which is a consumer magazine down in Australia has done a bit of a spiel on options trading seminars, featuring "The Big O" and a local spruiker. Read the article here.

They took quite an even handed approach, but there are some interesting quotes:

One company, Optionetics, says if you don’t make 300% on your tuition fee in six months you’ll get your money back. Another, Traders Circle, recently said at a free seminar that if you start with just $4000, its options “mentoring program”, “recipe for success” and trading recommendations will teach you how to earn $1000 per month for the rest of your life.

I suppose enough has been said around the traps about Optionetics refund policy, but Traders Circle claiming 25% per month? For life? Hmmmmmm. Excuse me a second while burst out laughing.

We attended free seminars and spoke to other experts to find out if options are really the best way to profit from volatile market conditions. We found options to be highly speculative, with a very real chance you’ll lose everything you invest. We also uncovered some dubious get-rich-quick claims that downplay these risks.

The bit in blue might not be necessarily true, but Choice probably couldn't help arriving at that conclusion from what was presented. Re the green bit - Indeed.

We contacted Traders Circle to confirm what we’d heard at their free seminars. They clarified that profits are before costs described in the company's financial services guide including trading fees (up to $82.50 per trade), education fees ($7000-$13,000) and monthly subscriptions ($349), and before losses from unsuccessful trades.

Holy Shit!!

While the risks of options trading are described and the company (Optionetics) proposes to teach people how to set predetermined entry and exit points for trades as a way to cut their losses when markets move the wrong way, there’s far less focus on the losses that customers must also be experiencing.

We’re not the only ones sceptical about the potential profit claims. “While it may be possible for such returns to be achieved, it would only result from adopting risky strategies,” says the SDIA’s Doug Clark. “The risk of loss from trading in options can be substantial. In all investments, high returns usually mean high risk. A good options adviser is invaluable to help you understand the market and give suitable advice.”

Rod Peters of ABN AMRO Morgans uses options for private clients, but mainly for capital preservation and to earn an additional income, rather than to speculate on big profits. He says 1.5% profit per month, or even double digit figures in a year, would be “a phenomenal return” from options, even for someone prepared to accept some investment risk. “I don’t believe the higher returns being quoted by these options education companies are sustainable,” he says. “Any astute investor would realise that to achieve those returns you need to get lucky, take extreme risks, or both.”
Good comments.

My biggest eye rolling moments come from the "it only takes 20 minutes a day" assertions. Here's what one client had to say:

"I attended an options seminar in 2002 and, while I thoroughly enjoyed the program and felt I learnt a lot, I believe that the instructors give a false impression in relation to both the amount of time and effort required to trade properly. It was stated during the seminar that, provided we put alerts and stops on our buys, we would need to spend no more than 20 minutes per day to trade successfully. However, I do not believe this to be true and feel, particularly if you are working in a full time position, that it is simply not possible to monitor your trades effectively enough to be successful." Fran
Lastly, something anyone that's been around options longer than 5 minutes knows about these seminars:

"The biggest problem I've found with a lot of these training companies that offer 'free' seminars is that the courses they spruik are expensive (probably to cover the HUGE of marketing that they must incur) and the content of the free seminar is purely a marketing vehicle to build hype for the product." - Paul
It not a bad article and a good read. It bags out these companies with reasonably accurate information, but unfortunately perpetuates a few of the pernicious myths about options trading if someone was seriously considering going about it the right way. Lots of good quotes to pull out of it too.


Mark Wolfinger said...

I just cannot believe it. They actually told you that you can make $1,000 per month on a $4000 portfolio, if you ignore losing trades!

So if I make $1,000 on one trade and lose $2,000 on another; and on top of that incur trading expenses and education costs - that counts as a 25% gain?

Wowee. Where do I sign up?

Mark Wolfinger said...

I have to verify

You are kidding right?

The company didn't really say those things.

Wayne said...

Just quoting straight out of the article Mark - and Choice magazine is a very respected publication in Aus, so I doubt they would have misquoted.

Australian spruikers say all sorts of things you wouldn't believe.

What's worse is that these people operate under an Australian Securities & Investmnet Commission licence, (which you can rent from a real licensee) which gives them an air of credibility they don't deserve.