Keeping My Options Open
Time for a confession: despite my occasionally left-wing rhetoric, I am in practice a capitalist of the worst stripe. Case in point: several months ago, I allowed myself to get talked into an investment scheme wherein a friend and I split the cost of one of those “insider tip” newsletters offering sure-fire ways to make money in the stock market. I figured I could scarcely do worse in the market than I’d done on my own, even if the purveyor of the system were an out-and-out criminal (which, by the way, he’s not, or doesn’t appear to be so far…). This particular scheme involved the buying and selling of options on the Nasdaq index fund (QQQ). In 18 trades in 2002 – not a great year for anyone’s portfolio, I think it’s safe to say – this system returned 280% (yes, two-hundred eighty, not a typo). Six losers lost 50% each, but the winners mostly hit paydirt to the tune of triple digits. Even if that’s just blind luck, it seemed worth a look.
For those who are innocent of the world of high finance, as I was prior to mid-September, options are contracts to buy or sell blocks of shares at a specific price on a specific date. If you have an option to buy at 25 and the price of the stock rises to 27, you make $2.00 on each share (and contracts are in blocks of 100 shares). It works the same in reverse. Only rarely do you exercise the option – that is, fulfill your agreement to buy or sell, then turn around and liquidate the shares at a profit. The money is made on the fluctuations that occur ahead of the expiration, based largely on people’s expectations of the upward or downward momentum of the market. Unlike stocks, where there is, in theory, an intrinsic kernel of actual economic value underlying the price, options work strictly at the margins. Options can (and do) lose all their value if the stock moves “out of the money” (e.g., above or below the strike price, depending on the type of option), and they expire worthless if not sold or exercised on their expiration date.
An added joker in this particular deck of wildcards is that the underlying vehicle is an index fund made up of the entire Nasdaq, not just a single stock. The QQQs are tied imperfectly to the Nasdaq at a rate of about 40-1 (e.g., a 40-point move in the Nasdaq index will move the QQQ a point) – about being the operative term, since percentage moves rarely match. The option is tied imperfectly to the QQQs, with a premium added based on expectations, momentum, and nearness to the expiration date of the options. The effect is like riding a high-speed rollercoaster on top of a hand-made wooden tower built on one of the cars, where the wheels only occasionally make contact with the tracks, and with a flaming pit looming at the end of the ride at expiration.
I learned the hard way that there are two basic rules to the system: follow the instructions exactly, and follow the instructions immediately. Sometimes a matter of a few minutes separates a modest gain from a loss, or an acceptable loss from a catastrophe. Holding out for that last tick can mean missing a buy opportunity or chasing a falling market down into the depths. In six trades since I signed up, the system is 4-2, with an average gain on the winners of about 120% and an average loss on the losers around 50%. If you manage your money right, that’s a good track record. Because I tried to second-guess the experts, I’m 2-3, with two big winners, three calamitous losses and one instance where I failed to get the money down on what turned out to be a modest (but much-needed) 40% payday. Overall, I’m about even, though I’ve paid out plenty in stress waiting for trades to execute or wondering if a tip arrived while I was out.
As long as I stay above water with this, I can regard it as a fun and educational sub-orbital flight into the thin air of capitalism, where financial strategy converges at the vanishing point with casino gambling. The way I see it, it’s only a matter of time before Vegas casinos add an option-trading floor, or Bally’s builds a deluxe new resort across the street from the NYSE.
10:40:04 AM 
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