Options trading is a complex, technical process requiring expertise. As one highly qualified equities trader told CHOICE, “it takes years to get your head around this stuff, and even that knowledge doesn’t mean you can make money”.
It’s this kind of knowledge that a number of options “education” companies propose to teach individual investors. One company is Traders Circle, which recently said at a free seminar that if you start with just $4000, its options “mentoring program”, “recipe for success” and trading recommendations will teach you how to earn $1000 per month for the rest of your life. Traders Circle claims that 80% of its options recommendations since 2005 have been successful and that every one this year has returned between 10% and 70%. By following their recommendations, Traders Circle claims investors can consistently earn 20%-30% profits per month.
We contacted Traders Circle to confirm what we’d heard at their free seminars. They clarified that profits are before costs described in the company's financial services guide including trading fees (up to $82.50 per trade), education fees ($7000-$13,000) and monthly subscriptions ($349), and before losses from unsuccessful trades.
Another company is Optionetics, a US organisation that claims to have introduced 336,000 people to its “reliable, carved in steel, highly effective trading method”. It runs free two-hour seminars nationwide. In Australia, it’s an authorised representative of Investment Educators Australia, which has a financial services licence and also authorises Safety in the Market, another company that runs investment seminars and shares the same office. Under its licensing arrangement, Optionetics is permitted to provide general but not personal advice about certain financial products, including derivatives.
Optionetics seminars give an overview of these complex investment products, play videos of testimonials from apparently happy customers and show examples of successful and highly profitable trades. They end with a sales pitch to the audience to sign up for an intensive education weekend with “lifetime reattendance”, plus options trading software materials and support. The price is $5795, discounted to $3995 for those willing to flash their credit card or chequebook on the night.
The company says 10,000 people in Australia have paid for its training and software, and reassures prospective customers with guarantees they can return the product for a refund within a few weeks if it’s not for them. If a person decides to continue but doesn’t make big profits quickly, the company also promises to refund the money – provided the person is prepared to satisfy its strict conditions.
Pot of gold
Optionetics claims that by signing up for its education course, following its trading strategies and making at least 36 trades, you can earn “300% return on your tuition fee in six months or you’ll get your money back”. That amounts to a $12,000 profit if you paid $4000 for training. However, 300% in six months is an enormous return – more than professional investors could dream of making on a consistent basis. It’s about 200 times what you’d earn with a bank deposit and 120 times the average annual return over the past five years from a professionally managed superannuation fund investing in shares. You’d also have to factor in your transaction costs; buying and selling 36 Australian options contracts (72 trades) could cost more than $3000 in broker’s fees, even if you used a major bank’s online discount broker.
The seminars present examples of even more spectacular profits made by Optionetics teachers and customers, including:
- $60,000 profit in six weeks on a $2000 call option – a quick 3000% profit
- $50,000 profit on a $675 option (about 7000% profit)
- A customer turning $94,000 into $638,000 (579% profit) by following the Optionetics system.
While the risks of options trading are described and the company proposes to teach people how to set predetermined entry and exit points for trades as a way to cut their losses when markets move the wrong way, there’s far less focus on the losses that customers must also be experiencing.
We’re not the only ones sceptical about the potential profit claims. “While it may be possible for such returns to be achieved, it would only result from adopting risky strategies,” says the SDIA’s Doug Clark. “The risk of loss from trading in options can be substantial. In all investments, high returns usually mean high risk. A good options adviser is invaluable to help you understand the market and give suitable advice.”
Rod Peters of ABN AMRO Morgans uses options for private clients, but mainly for capital preservation and to earn an additional income, rather than to speculate on big profits. He says 1.5% profit per month, or even double digit figures in a year, would be “a phenomenal return” from options, even for someone prepared to accept some investment risk. “I don’t believe the higher returns being quoted by these options education companies are sustainable,” he says. “Any astute investor would realise that to achieve those returns you need to get lucky, take extreme risks, or both.”
Definition of "loss"
CHOICE put it to Optionetics that statements claiming people can make profits like 300% in just six months while taking low risks are akin to get-rich-quick claims. “It is not a get-rich-quick scheme and we don’t promote it that way,” insists Wayne North, the company’s General Manager Asia Pacific. “We teach clients how to take a profit and limit their risk. You don’t need to get many trades right to make a profit.” The company doesn’t know or track how many customers earn 300% profit in six months, but says it receives very few money-back claims. Optionetics argues one reason options are less risky than shares is that the stakes are lower. “With shares you risk 100% of your investment,” says North. “Well, that’s also the case with options, but they’re a leveraged risk product. With an option, you can invest 3%-5% of the value of shares and ‘control’ them. If share prices move the wrong way, 3%-5% is the maximum you can lose.”
Herein lies the problem with such claims, which perpetuate consumers’ misunderstanding and underestimation of the risks. The stark reality is each time you buy an option you could lose 100% of your capital or investment (and if you sell options, your potential losses are unlimited). The size of an investment or bet bears no relation to its chances of success or failure. That your trade costs 5% of the face value of the underlying shares doesn’t reduce the chances of losing money.
- $1 TRILLION is what $1 would grow to over 10 years, if 300% were earned and compounded every six months.
- $425 BILLION is the value of $1 after 10 years, if it grew by 25% per month, compounded monthly.
If such consistent profits were really possible, would these companies waste their time running seminars?
Optionetics claims these calculations are sensationalist. Traders Circle says the figures are “out of context with how we explain our education service” and it recommends periodically withdrawing some options profits to put into more conservative investments, rather than reinvesting all profits in further options trades.
However, our calculations should make investors seriously analyse the returns they can expect from options trading.