A little deviation from regular programming.

For some reason (reporter ran out of sources? strategically paid for advertising?), the daily paper here in Singapore recently ran two very similar stories in their Invest section.

Story 1 (published 25 Dec 2016) had this as part of the blurb:

Investor learnt about value investing using options a few years ago and has since built up a $2.2 million portfolio.

While story 2 (published 22 Jan 2017) had this to say:

“When buying options, you need to be making directional trades all the time, but I got rid of that by selling options on either direction. I don’t care if the stock goes up, down or doesn’t move, as long as the price stays within range.”

MR BHARATH JAYARAM, on how selling options on equities and indices that are not very volatile has worked for him.

Thing is, I really used to like that section for profiling successful investors or business people but in recent years, that section has fallen by the wayside. I don’t doubt the authenticity of the stories featured but I highly doubt the value of the stories. At best, the stories featured will get more people interested in options trading and some of those people might make it but it’s highly likely a majority will probably lose money. What’s worse is if a majority dive head in, thinking it’s easy money and then get burnt in a horrendous crash in the markets.

First, let me say that the timing of the stories point to what I suspect is a bigger problem for any investment. In the foundational economics class that I teach, this is what we call the Fallacy of Composition. The fallacy is in thinking that what works for a few people will work for everyone else and therefore when people start to follow in the footsteps of a few highly publicised cases, that very act of following ensures that the initial method stops working. For example, when a place with a bargain gets publicised enough, the ensuing crowds all but guarantee that the bargain won’t last too long.

Given that both stories were about people making money through trading options and that trading options is usually limited to the US markets, I’m beginning to suspect that the days of making easy money through options may be over for the least savvy investors and those who have just joined the party might just find the reason to swear off the financial markets for the rest of their lives.

Of course I could be wrong, the way the story may play out would be that an investor new to selling options start by selling puts, make some decent money on those puts as the market runs up, then decides to go all in by selling puts and buying calls only to see the markets drop off a cliff and wipe them out completely. Some close variation of that scenario could also play out.

I don’t know for sure but what I’m sure is that the Straits Times isn’t doing anyone a service by publishing those two stories.

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