Wednesday, November 13, 1996
Once in a Lifetime
or
Confessions of an Options Trader
by ROPESPINER

Have you ever noticed how life imitates songs, or movies imitate life, or life imitates books? Or maybe it's the other way around. I never could get it right. You know, it doesn't matter if you can quote every word Bud Fox says in the movie Wall Street or recite Shakespeare like any good Fool. You might even have your favorite verse from a song that makes you think you're under control. So what does this rambling have to do with anything? Nothing really, but it's the way we all think. Reality gets confused.

You see, I trade options for a living, or at least I did for a number of years. And believe me, when you trade options you need anything you can find to keep your head screwed on straight. Everything that helps is relevant because the world of trading options is not reality, believe me. Even my screen name is a reminder. Yeah, that's right ROPESPINER (it's actually Ropespinner from The Ropespinner Conspiracy, a fictitious financial thriller by Michael Thomas). Anyway the idea is that Lenin -- not John, the other one -- once said: "Capitalism will sell us the rope with which we hang it." That's what options trading is -- the rope.

I am an excellent technical analyst with a masters degree in economics, but that does not make me a good options trader. I have read over one hundred and fifty books on the markets, trading, anything that has to do with stocks, bonds, options, etc. (I actually counted them.) If you think options will make you rich, they can, but they're more likely to put you in the poor house. I have made as many as 15 trades in one day. I have made $10,000 in the morning and lost it in the afternoon, all of this achieved from my home while wearing blue jeans and a tee shirt that said "Clinton Gore Gone in Four." See, I told you trading options is not reality.

Think about it -- the life of luxury. Working at home, making a nice living, driving the car of your choice and taking it easy. Like I said, it's not reality. Options trading takes a knack that I could never fully master. I'm not sure anyone can. When you think you have the right stuff, the stuff changes. Reality, or the lack of it, changes. You worry all the time and if you don't, that's not real either. You see, it's not about being right; it's about making money, and the odds are stacked against you.

Let's take a closer look at one OEX trade of 10 options contracts. First you lose the spread between the bid and the ask which is a minimum of 1/8, or $125 on 10 contracts. Then you have commissions both entering and exiting your trade (for 10 contracts at the money), about $150 total (minimum). You start off down by $275, that is if your order is filled correctly and at the price you expected. Sure there are many ways to place an order but that's yet another reality.

So if you're very lucky, you only need your option to move 3/8 to break even. Hey, what's 3/8 when you're expecting at least 5 points, right? You figure you will make $4,725 so that 3/8 is no big deal. Sure, but you forgot a few things, like the fact that options erode at a rate of about 1/4 point per day. Additionally, they may have been inflated when you bought them, so really you are down by $275 plus $1,000 for inflation plus $2,500 because you expect to hold the options for ten days. Why ten days, you ask? Because that's how long you expect it to take the market to do what you planned. Ok fine, let's say the market does what you expect in ten days and you make $5,000 minus $275 minus $1,000 minus $2,500, for a profit of $1,250 for two weeks of sweating and downing antacids. If you trade like that and never make a mistake, your annual income is less than $35,000. That's right $35,000!

HELLO??? Are you back in your seat yet? Fine, then we can get back to the future. The reality is that if you are still reading this Fribble, $35,000 is not what you plan on making. In fact, that's probably less than you plan on spending for your next car. Am I exaggerating? I don't think so.

Remember, you can make a lot of money in options, but you're more likely to lose it all. I eventually did. I won't say how much, but let's just say it was enough that if I had used the Motley Fool's model portfolio (up more than 50% this year), I would be playing a lot of golf and still wearing the same tee shirt. So before you start throwing away your future, think Talking Heads (no not CNBC anchors -- I mean David Byrne). That's right, "you may ask yourself, am I right or am I wrong?, and you might ask yourself, my god, what have I done?" (verse from "Once in a Lifetime," from the album Stop Making Sense). And the answer is that you have probably just lost everything on a beautiful options trade.

Transmitted: 11/13/96