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MILLIONAIRESPLANET EZINE
money . success . freedom
Feb 2005 Issue #30
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Welcome to the latest issue of "MILLIONAIRESPLANET EZINE"
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IN THIS ISSUE
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1. Feature Article
2. Quote of the Month
3. Your Question Answered
4. Special Offers
5. New Book by Azizi Ali
6. Disclaimers
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1. FEATURE ARTICLE:
This month, I would like to share with you an excellent article
written by Bill Wermine, a good friend of mine and author of "How you
can get rich from Swing Trading". Read, enjoy, benefit and keep your
money!
And yes, have a happy, healthy and prosperous Chinese New Year! May
the typhoon of wealth blow your way in 2005.
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Pitfalls of Options
by Bill Wermine
Imagine visiting Genting Casino and playing roulette. There
are 18 black numbers, 18 red numbers and 1 green zero.
If you simply bet red or black you will be paid even money
should red or black come up. However if you bet red or black
and the green zero comes up you will lose your bet that you
placed on red or black.
The green zero represents the house edge which is 2.6 %.
If you play the options game by buying options the odds are
about 80 % against you versus 2.6 % against you if you play
red or black at Genting.
This report will show the reasons why the odds against the
small options trader are overwhelmingly negative.
"Options are one of the greatest and most costly
frauds ever perpetuated on the trading public."
FH Goslin, Market Wizard and author of Trading Day by Day
Options have limited risk for the buyer and unlimited risk
for the seller. That is why most small traders buy options
rather than sell them. Unluckily for the small traders, the
buy side of options has many built in disadvantages. The
odds are stacked against the buyers (primarily uninformed,
small traders) and in favor of the sellers who are for the
most part institutions, large hedge funds and big money
interests.
The major problem with options is that they are time
depreciating assets. If you buy a share or futures contract
and a month later the price is unchanged you lose nothing.
You will be even.
If you buy a call or put option and the price of the
underlying stock or future is unchanged a week later, you
will have a loss. Every day you own the option the value
depreciates.
This means that time is working for the seller (big money)
and against the buyer (small money).
Because of time erosion, it means not only must you get
the direction right, your timing must be exact and the move
in your favor must be substantial.
Getting timing right as well as direction is hard enough as
a trader. When you add in the need for a substantial move
(to cover the cost of the option) the probabilities of
success are very low.
In shares or futures, the odds are 50-50 as shares and
futures are simply an up and down game. In options, the game
is closer to an 80-20 game against you the options buyer.
No matter how good you are as a trader, these are difficult
odds to overcome on any regular, consistent basis.
You may ask, if the odds are so much against the options
buyer, why not be a seller?
The risks as an options seller are also formidable: These
include high margin requirements and unlimited risk should
the market move in the wrong direction.
These risks make it difficult for small money players to
participate and profit as options sellers on a consistent
basis. To properly take advantage of the odds for the seller
requires an account to be capitalized with several hundred
thousand dollars. Very few individual traders have an
account this size to develop to an options selling program.
Large traders sell thousands of options with various strike
prices just like a life insurance company sells life
policies. Yes, an option will go bad just like a life
insurance company will have to pay death benefits. Because
the risk is spread the life insurance company will have no
problem paying off a policy. Because a large trader sells
thousands of options he has no problem covering the
occasional loss. The economy of scale insures that the
options sells odds work for him.
A small trader who sells a limited number of options is
gambling and risking much more. He has no economy of scale
and runs the risk of substantial losses should just one
trade go bad.
The pricing of options
Options prices are arbitrarily set by the sellers. They are
determined by options pricing models which are skewed to the
benefit of institutions and big money interests. In other
words they are not really set by free auctions between
buyers and sellers.
Options are priced by options sellers based on time value,
intrinsic value and volatility.
If the dollar values for volatility and time are too low,
the buyers will have the advantage. If they are set high,
the sellers will have the advantage. Understandably, since
the options industry overwhelmingly sells options, the time
and volatility factors are set up to produce high prices.
They are set up arbitrarily to inherently favor the sellers
(who control the options industry) and against the buyers
who are the customers of the options industry.
Bottom line
The actual payout is too low in relation to the true odds.
The pricing formula insures that the payouts are much less
than the true odds. Just like a casino, although the odds
are much better for the player in a casino than in the
options markets. Again it means the odds are tilted in
favor of the sellers.
The pricing formulas which are biased statistically insure
there is no real risk in selling options for a large fund
as risks are spread unlike a small trader who risks ruin
by not having the funds to spread risk.
The clever Nobel laureates who awarded a Nobel Prize for
the Black Scholes Options pricing model handed a gift to
the options industry. They gave a pricing formula which
could easily be rigged to permanently favor the sellers.
Some might argue that options is a fair game. Why are there
many hedge funds whose sole function is to sell options?
I have never heard of one whose mandate is to buy options.
The reason is simple: No one in the fund industry is so
foolish to believe that a fund whose sole purpose is to buy
options could ever be a profitable business.
Many options experts would vigorously argue these points:
They would say using delta neutral strategies, spreads and
numerous fancy techniques are profitable. Reality is
different. It boils down to getting timing and direction
right รข€“ not that simple or easy. These fancy strategies
may help limit loss but is this any consolation?
If you should absolutely insist on buying options, stick to
deep in the money options with little time value and use a
disciplined risk management strategy.
Even this strategy has disadvantages but may show minor
profits.
My bottom line advice: Just ignore options; act like they
do not exist. Your bottom line will be better for it.
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2. QUOTE OF THE MONTH
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"The world has a habit of making way for the
man whose words and actions show that he knows
where he is going."
* Napolean Hill *
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3. YOUR QUESTIONS ANSWERED
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Q: Suggest you charge minimal "consultancy fees" to those
who want personal questions to e answered in future.
Perhaps this way you won't feel you're wasting your time?
Win-win for both. Don't forget they are many looking up to
you, so "shutting them away" isn't too brilliant either.
Personally I feel you should keep up the good work. You are
one rare breed! As Malaysian, I'm proud of you.
A: No, I don't feel like I'm wasting time reading your
questions and answering them. If not, I'll not be doing
this!
I only wrote that I cannot give personal answers or "urgent"
answers as my time is limited. Of course, I cannot answer
the entire question as some of them will require me to
write 10 pages. Still, I do read all emails, so keep them
coming!
* HOT TIP *
Read "Turbo Strategy" by Brian Tracy
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4. SPECIAL OFFERS: Property Seminar
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1. The *number 1* property seminar in Malaysia is back!
Title: Be the next Property Millionaire
Date: Sat 5th Feb 2005
Time: 9 am - 6 pm
Venue: Holiday Villa, Subang Jaya
Click here to find out how you can benefit from the real
estate revolution. Register now as we have only a few seats
left!
http://www.millionairesplanet.com/events.html
PS: Each pax will receive a complimentary copy of Azizi's
latest best seller "How to Become a Property Millionaire".
2. The first ever "How to Write a Bestseller in 88 days" Writing Workshop
If you always wanted to write a book but did not know what
to do, how to do it or who to ask, then this workshop is
for you. Details follow:
Title: How to Write a Bestseller in 88 days
Date: Sat 12th Mar 2005
Time: 9 am - 5 pm
Venue: Holiday Villa, Subang Jaya
Register now as to take advantage of the early bird offer.
Click here to find out more.
http://www.millionairesplanet.com/events.html
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5. NEW BOOK FROM AZIZI ALI
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Azizi's latest book "mXe! five keys to become an Extreme
Millionaire" is out now. As the title suggests, this
book is about how you can get to be a millionaire as
quickly as possible while doing the things that you love.
If you have benefited from Azizi's previous books, then you
will no doubt love this latest offering. You will find gems
inside this book, which include Azizi's own secret of
success and formula of living life.
Place your order now and be one of the first to get this
storm.
For more details, please click on:
http://www.millionairesplanet.com/pro.html
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6. DISCLAIMERS
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This e-zine is for educational purposes only. The author and
publisher specifically disclaim any responsibility for any
liability, loss or risk, personal or otherwise, which is
incurred as a consequence, directly or indirectly, of the
use and application of any of the contents of this e-zine.
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So that's it, folks. The latest FREE issue of the
"MILLIONAIRESPLANET EZINE". I trust that you've picked up
some useful stuff that can help you become a Grand Master
of Money.
So tell your mom, tell your dad, tell your girlfriends and
your boyfriends too, and ask them to join the party!
Until the next issue, keep your eyes on the money and
here's to the next million!
Azizi Ali
*Millionaires Coach*
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Copyright 2005 Azizi Ali
All rights reserved
-------------------Signature File----------------------
Azizi Ali
True Wealth Sdn Bhd
email: info@millionairesplanet.com
website: www.millionairesplanet.com
tel: 03-7880 1051
fax: 03-7880 8051
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