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Lionel,
After reading his "proof" exposing this guy is easy and I don't even have to
check his *hypothetical* trade prices, nevermind his real ones. The guy is
all over the place, having us in a trade for 3 hours one time and 30 days
the next. He also expects us to ignore the fact that these gains weren't
made over a series of many trades but just 2 huge totally disimilar trades
made months apart. Practically one-offs in other words. Especially since the
stocks he mentions are extraordinary to say the least as well as the time
periods in which he trades their options. These stocks have exhibited
unprecedented prices moves during a never-before-seen 3 month market period
that saw the Dow gain more than 30% and a NASDAQ gain of almost 85%. To
imagine this "easy money" is the normal state of the market from now on and
trades like this can be made daily is total naivete.
Now here's how the math catches up with his charade:
Of course buying CALL options can keep his losses small EXCEPT he bets his
whole wad on each trade because he infallibly calls the highs and the lows.
But if he looses, which he implies he sometimes does, he looses EVERYTHING.
End of fairytale.
Obviously he has lived to trade again so he must not be betting everything
and perhaps he's practicing a little bit more money management than he lets
on. In which case, his 2400% return on his *account* is not what it he makes
it out to be.
Let's keep it simple. Say he still bets a very imprudent 10% or $1000 of a
$10K account on the AOL trade. He wins $24k. Suddenly his total hypothetical
account's return is just 240%, still not too shabby. However, maybe he's not
so wild and crazy and only bets 2%. Now his total hypothetical returns are
back down to a more believable 48%.
But, he completely ignores slippage and commissions. Not that commissions
would be adversely huge (maybe for a 1000 contracts though) but they sure
won't be $20 roundtrip either! Slippage, on the other hand, could be very
adverse to his options' return and it is a stretch for us to believe that
he, as a retail customer, could buy 100, much less a 1000, contracts of AOL
for a 1/16. Frankly I can't even imagine an expiring option with strike of
$160 for a wild stock like AOL trading barely out of the money that low, but
perhaps it did among option makers/institutional accounts at the low of the
cash market. Nevertheless his trade would probably make up a substantial
part of an expiring options' total open interest that day and as soon as his
order hit the sheets the options' bid/ask would fly. He's talking trading
10,000 to a 100k shares of the underlying here too and the options maker is
also gonna lay that risk off in the cash market. Needless to say, he seems
to lack a complete understanding of the market dynamics. Cutting him some
slack and allowing slippage to bump a market order price up to just a
measily 1/4 point lowers his trade return to 60%. And using 2% of his total
account to enter lowers the return to a *really* more normal 12%.
Now here's the big surprise! Once he starts making his big profits the IRS
is gonna want a piece of it. In advance! Because as anybody who has made big
profits in stocks learns, you gotta pay your estimated taxes quarterly
whether you finish the year at an overall profit or not. Otherwise the IRS
paddles your behind with penalties. This directly impacts the amount of his
trading capital available throughout the year, hence the overall profit he
can generate, thus lowering his return even more.
So as you can see, unless you belive 1-2 lucky trades vouche for a persons
trading skill, just overcoming the frictional costs of trading is a big
hurdle for any trader regardless of his system or lack thereof. Even a huge
win can be cut down to size.
Of course the simple solution is to make more than 1 huge trade a month but
I doubt if he could conjure up enough historical data. Certainly not enough
to satify my risk profile.
At least I give him credit for buying slightly out-of-the money CALLS on
highly volatile stocks on expiration, as it is a tried and true strategy.
Especially, in these net stocks like AOL when they are splitting the
following Monday. It's a great punt WHEN it pays off. But make no mistake,
that's exactly what it is, a punt, as any option maker will tell you. Just
like a lotto ticket, 99.99% of these plays expire worthless, except in this
case the ticket would cost you a minimum of $625. But when they payoff, the
rewards can be spectacular. I congratulate him on his paper win, but now the
challenge for him is turn his Monopoly money into cold cash.
cheers,
Rick
-----Original Message-----
From: Lionel and Gail Issen <lissen@xxxxxxxxxxxxxxxx>
To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
Date: Thursday, February 25, 1999 1:13 PM
Subject: Re: S&P 500 (was AOL, CSCO, & WMT)
>Docteur:
>
>Your "proof" is after the fact. What have you traded?
>
>
>Lionel Issen
>-----Original Message-----
>From: Docteur <docteur@xxxxxxxxxx>
>To: metastock@xxxxxxxxxxxxx <metastock@xxxxxxxxxxxxx>
>Date: Wednesday, February 24, 1999 7:52 PM
>Subject: Re: S&P 500 (was AOL, CSCO, & WMT)
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