Third in our series of "investment" products, today we're going to debunk the option myth.
Feel free to refer back to the great discussion at this post.
For the past few years on late night and Saturday afternoon TV we've been inundated with infomercials convincing us to attend "free" seminars offering to teach us how to dump our jobs, get rich quick and lead the lifestyle that Bill Gates wishes he could. And just what are these "gurus" offering to teach us? How to flip real estate and how to trade trends and use options.
Now again, I'M NOT A FINANCIAL ADVISOR, nor am I a trading expert. If you asked me over a beer how much I know about options, I'd say more than most people but less than someone who trades them. I've never touched the things. But man do I want to.
I'll admit, I enjoy a good game of poker. There is something about gambling with skill and a bit of intelligence that is oddly exciting. I figure options would be the poker equivalent of the stock trading world. And they certainly don't qualify as an investment using our definition form the above-linked post. Nope, pure speculation.
Here's how it works: you borrow stocks betting their prices will go up or you lend stocks betting the prices will go down. The price you agree to pay is the price they were worth at the time of the contract. You collect the difference between the two prices if the contract is exercised. Really sophisticated options traders can even borrow stocks to lend out and thus play the game at both ends. These transactions are called "puts" and "calls." And they are complicated by time limits, so just when you think things may be looking your way finally, ding, ding goes the bell.
This is an overly simplistic explanation that is full of inaccuracies, but you get the idea, non? It's trading on margin and you can lose as big or even bigger than you can win. Think buying a house right now and watching its value drop 40% in 6-months and you still owe the bank and you can't sell the house.
Last I checked, you had to have considerable experience with a brokerage and considerable wealth to get into this game and stellar credit. You also had to have a brass jock or jill; these kinds of investments when they go wrong feel like a swift kick to the groin, I'm willing to bet.
The best way you and I can get a taste of the action, without the knowledge or finances to back it up, is through investing in hedge funds. Even those are super risky. Just ask those people invested in the Bear Sterns hedgies that got dragged down to their death by the US housing market downturn.
Anyone reading this playing this game? How's it going for you? Do you do it through an online trading system like Action Direct or E-trade? Inquiring minds would like to know.