I’ve been getting a lot of requests lately to place advertising on my blog. Unfortunately, most of it is completely inconsistent with my message about how to handle money. Many are from payday loan companies. It’s sad that some people have got their finances into such bad shape that they feel the need to take loans from these companies at such exorbitant interest rates.
The latest advertising request came from a web site (that I won’t name) devoted to strategies for gambling with stock options. There are some sensible uses for options, but this web site was not promoting sensible strategies.
The strategies were a long-winded version of the following:
“If you think a stock will go up, buy a call option.”
“If you think a stock will go down, buy a put option.”
“If you think a stock will have a big move, but don’t know which direction, ...”
And so on.
There are dozens of option strategies for ever more specialized situations. The problem is that you can’t predict the future to tell which option strategy to use. If you buy a call option, but the stock doesn’t go up, then you lose your money. If you split your money among several guesses, you will lose money, on average, due to the commissions and spreads on the option purchases.
Much of the promotional material on the web site focused on “success stories” that give no information about how the typical person has fared trading options with this web site’s advice. One promotional video included the following breathless come on:
“All these people, people just like you, found a simple, easy way to make the kind of money they never thought possible. They found the key that unlocks the unlimited potential wealth created by the stock market. And best of all, they found out how to do it risk free through the free [company name] expo coming to your area.”
Saying “risk free” here makes it sound like the option strategies have no risk and that you’re guaranteed to make money. In fact, the “it” that is “risk free” is the expo that you can attend without paying any money. The option strategies are definitely risky.
Let me reiterate that there are specialized circumstances where stock options can be part of a sensible investing strategy as a form of insurance to reduce risk. I’ve never had the need to trade in options myself, but it could come up. However, if anyone is telling you to use options to get rich, you should be very suspicious.