Who Can You Trust? (Part 4)

Today I want to finish quoting some highlights from the Fraud Aid website, which is an excellent source of information that I encourage everyone to visit for a more comprehensive presentation.

          “The next step is to make himself or
          herself appear to be the only person
          on whom you can rely for the fulfillment
          of your wishes, desires, and/or personal
          safety. Keep in mind that in order for
          the scam to work, the scam artist will
          gain your complete and unquestioning
          trust, and they are very, very skillful
          at doing this.

          The final step is the move on your
          money or property… you will be instilled
          with a fear of contacting the authorities.
          To accomplish this, the scam artist will
          use whatever fear is uppermost in your
          emotional catalog. In your mind, you
          will feel that to take any action will
          either make you look foolish, and/or
          you will fear retribution from the con
          artist, and/or you will fear even the
          authorities themselves. If the scam
          has gone on long enough, you have
          been brainwashed, quite literally, into
          believing the scam artist more than
          the authorities and those close to you.”

Fraudsters gain access through emotional vulnerability. Any heartfelt cause can serve as such a vulnerability. Alignment with something I am passionate about can instantly make me feel comfortable and/or trusting of a complete stranger. American Greed has shown us many causes used to this end including religion, charity, and family/health.

What struck me about the November episode was the addition of a new cause to the list: motivational speaking. Here’s a guy in Ross Mandell acting as a motivational speaker but interested only in stealing from others!

I am a strong believer in the motivational speaking/coach mentality because it embodies positivity. As traders we incur losses/setbacks but we must remain confident and positive/strong in order to succeed. I could do any number of blog posts on subjects like positivity, meditation, and affirmations. To now realize that a fine line exists between something about which I believe so strongly and a tool for fraud and chicanery does not make for a happy day.

Who Can You Trust? (Part 2)

Before I continue, I want to discuss some basic concepts of fraud. Fraud Aid is a fraud victim advocacy nonprofit organization. I strongly encourage you to visit their website, which discusses the subject masterfully.

From their website, I am going to quote some highlights:

      “Fraud is an insidious, sneaky crime that ruins individuals
      and families, causes corporations to go under… raises
      insurance costs, raises product costs, and produces untold
      grief at all levels of society worldwide.

      It steals food from the mouths of the hungry; it causes
      homelessness, unemployment, increases the welfare tolls
      and yes, even brings death…

      …And yet, fraud can be stopped. You and me, we can
      stop fraud.

      All it takes to stop fraud is awareness… for each and
      every person who had an experience with a scammer to
      tell a friend, a neighbor, the cashier at the grocery
      store, a cousin, a sister, a brother, a mother, a child.

      No one is immune to fraud… What is an obvious fraud
      to one sounds like an opportunity to another…

      …Working together we can make it so difficult for
      fraudsters to pander their false hopes that the numbers
      will actually begin to dwindle.

      How can that be accomplished? By ensuring that every
      incident of fraud is reported as a theft report, and
      by ensuring that every suspicion of fraud can be
      reported without fear of ridicule from those who
      should be offering support…

      Only a very small percentage of people ever report
      a fraud theft or identity theft, and so the numbers
      appear small. As long as that continues, fraudsters
      will continue to thumb their noses at law enforcement
      and at all of us.

      Fraudsters are laughing like hyenas. They laugh at
      law enforcement and they laugh at their victims. They
      will keep doing so until we, working together, turn
      their greedy joy into tears of frustration.”

Who Can You Trust? (Part 1)

In an industry rife with liars and cheaters, I believe the road to long-term success must include education about fraud to avoid being sucked dry from others before trading strategies capable of generating consistent income are mastered.

CNBC’s American Greed is precisely the kind of documentary show to provide this sort of education. On November 6, 2015, CNBC featured the story of Ross Mandell.

From the episode, narrated by Stacy Keach:

      “In June 2011, Ross Mandell was tried in New York Federal Court,
      Manhattan. After five weeks he was found guilty on all counts and
      sentenced to 12 years in prison [securities fraud]….

      …for anyone else, this might be the end of the story. But not so for
      Ross Mandell. Before he’s supposed to report to federal prison, he
      catches a break and he’s allowed to remain free while his case works
      its way through the appeals process. For the next three years, he
      lives with a GPS ankle monitor at his Boca Raton mansion with his
      family and becomes a self-described motivational speaker with his
      own web series, ‘Our Time with Ross Mandell.'”

      [Ross Mandell screenshot from his web show] “This is OUR time. I
      come to you today with a sense of outrage!”

      [Keach narrating] “He has titles like ‘This Too Shall Pass…'”

      [Ross Mandell on screen talking] “One day, the sun will shine if
      you allow it.”

      [Keach narrating] “‘Yes I Can…'”

      [Ross Mandell on screen talking] “Losers say yesterday and winners
      say yes today.”

      [Keach narrating] “…and ‘Dress for Success.'”

      [Ross Mandell on screen with black sportscoat and white tie talking]
      “I know what you’re thinking: man, that dude looks handsome today.
      Suit and tie, money, power: that’s what I’m after.”

      [Keach narrating] “But in May 2014, the Second Circuit of Appeals
      hands down its judgment: there will be no change in Mandell’s
      status. And three months later, he finally reports to federal
      prison where he will serve out his 12-year sentence.”

This is an interesting case study that bothers me immensely.

Are Dividends Income? (Part 4)

One problem I have with the whole dividend concept is the belief they are “free money,” which I just debunked.

Remember that I began this blog mini-series with the question of whether dividends are income and YES took an early 3-0 lead. The score is now 3-3. If you survey many investors about dividends then I would guess very few realize dividends received now come at the cost of total stock price appreciation later. In financial terms, “income” does not imply offsetting loss.

One theme we occasionally see in Finance is that of “synthetic equivalents.” These are things that seem different but are actually the same. Sometimes they are workarounds: other ways of doing the same thing. In option trading, covered calls and cash-secured puts are exactly the same thing. Time and implied volatility are also synthetically equivalent or substitutes for each other. Far more pairings in Finance strike me as having trade-offs subject to different pros/cons rather than one being definitively better/worse than the other. I believe dividend payments (income) vs. capital appreciation (growth) falls under this umbrella too.

When we have multiple ways of doing the same thing, the problem for me arises when someone tries to assert a difference and advertise why one is better than the other. This is persuasion and propaganda along with marketing and advertising. This is sales and how to make a buck. This is optionScam.com.

When it comes to dividends, people do accentuate a difference and people do assert differences between “income” stocks and “growth” (no dividend) stocks. I will resume there in the next post.

Are Dividends Income? (Part 3)

When a dividend is paid, a commensurate drop in stock price immediately takes place. And just like that, I’m back to categorizing this as optionScam.com because many people give props to dividends as if they come at no cost.

As I discussed, objectives recognized by the industry to personalize financial advice include growth (capital appreciation) and income (e.g. dividends).

With that commensurate drop in stock price, though, capital appreciation and dividend payment become two sides of the same coin!

How can that be?

If I buy a stock at $100 that has a 4% dividend yield, I will make $4/year in dividends. Suppose the stock appreciates 4% per year and the dividend remains unchanged.

After 25 years, I can sell the stock for exactly what I bought it for: $100. I also collected $100 in dividends. Had the stock paid no dividend then, assuming everything else remained constant, the stock would have been worth $200: twice what I bought it for! Whether “income” or “capital appreciation,” total return is equal: I make $100/share either way.

Some people will argue that were the dividend not paid, the company would be in a better position to grow the business. Perhaps they could buy out competitors and improve operating efficiency to make more money. Perhaps they could go into new areas or fill an untapped niche. Either way, they could boost profitability and generate more capital appreciation than they could otherwise with dividend payments. These are just theoretical arguments, however.

In a sense, income vs. capital appreciation is “pay me now or pay me later.” With income, I receive dividend checks along the way. With capital appreciation, I receive nothing until I sell the stock at the end. At that point, I receive at least the sum of all those dividend payments never made.

I could easily simulate a dividend stock by simply selling some shares on a periodic basis. This means the “pay me now or pay me later” may not even be a material difference because I can make “pay me now” out of “pay me later.”

Are Dividends Income? (Part 1)

Today I begin an inquiry into whether dividends are income.

While I am skeptical (I believe you have to be in this business), I have no financial interest hinging on the outcome of this inquiry. I have currently categorized this under optionScam.com but I will re-categorize as I see fit. This is a good example of blogging to organize my thoughts about the financial industry.

Google “dividend income” and you will find numerous hits. At investopedia.com, part of the description includes the words:

      > Mutual funds pay out interest and dividend income received from
      > their portfolio holdings as dividends to fund shareholders.

I googled “what is income” and found:

      > Money received, especially on a regular basis, for work or through
      > investments. “He has a nice home and an adequate income.”

Dividends are received as part of the investing process, which makes the score 2-0 in favor of dividends as income.

I get hung up on the conventional meaning of income and I believe the latter example given is more typical of common usage. Most people work and earn income.

Accounting would probably recognize this as wage income, or “wages.”

The IRS also defines active income and passive income! Maybe I just need an accounting course or two to get to the bottom of this. Once again, from Investopedia, passive income is:

      > Earnings an individual derives from a ren​tal property, limited partnership
      > or other enterprise in which he or she is not materially involved.

That doesn’t sound like investment returns but if I read on:

      > Portfolio income is considered passive income by some analysts, in which
      > case dividends and interest would be considered passive [italics mine].

So maybe it is and maybe it isn’t passive income depending on who you ask?

It does seem to be some sort of income, though, so score it 3-0 thus far in favor of dividends as income. I will continue in the next post.

Do Most Options Expire Worthless? (Part 3)

In Part 1 I presented Summa’s notorious option myth and in Part 2 I presented its debunking. Today I bring in one more voice of reason.

If you have spent time in the option education circles then you’ve probably heard of Brian Overby. Overby has given many presentations on different option topics and he has also authored a book on option trading. He is or has been Senior Options Analyst and/or Director of Education for TradeKing brokerage. I feel being associated with a prevalent brokerage house like TradeKing gives Overby some credibility. I think he’s less apt to spread fictional/fraudulent claims because the reputation of his employer hangs in the balance. This is no guarantee (e.g. Peregrine Financial Group) but…

Addressing the question what percentage of options get exercised, Overby writes:

      > the correct answer is this: according to the Options
      > Clearing Corporation’s 2006 trading year results…
      > around 17% of all options contracts opened got
      > exercised. About 35% expired worthless, and almost
      > half (48%) of the rest got bought or sold to close
      > in the open market.
      >
      > If these numbers seem surprising go back to the
      > basics of option for an answer. It’s easy to lose
      > sight of the fact that an option is a contract. We
      > often think of options as hot potatoes that get
      > passed around until they wind up in someone’s hands
      > at expiration. But actually, if an option contract
      > gets closed in the marketplace, it just ceases to
      > exist and will therefore never make it to expiration.

I think we can pretty much put this option myth to bed. No, most options contracts do not necessarily expire worthless and no, this is certainly no reason to sell option contracts. We may come up with other reasons but certainly not this one.

Do Most Options Expire Worthless? (Part 2)

In the last post I detailed what I believe to be the root of this notorious options myth. Today I bring some critical analysis to the party.

I’m going to let some other writers do the heavy lifting. Let’s begin with this:

      > A common claim is that 90% of options expire worthless,
      > and that therefore it is better to be a seller of options
      > than a buyer of options. This claim misstates a statistic
      > published by the Chicago Board Options Exchange (CBOE),
      > which is that only 10% of option contracts are exercised.
      >
      > But just because only 10% are exercised does not mean
      > the other 90% expire worthless. Instead, according to the
      > CBOE, between 55% and 60% of options contracts are
      > closed out prior to expiration.

So here’s the rub: did the CME data showing 75% of all options held to expiration expired worthless mean 75% of all options expire worthless? Not necessarily. We would need a breakdown of options held to expiration vs. options closed out before expiration.

Continuing on:

      > So if 10% of options contracts end up being exercised,
      > and 55-60% get closed out before expiration, that leaves
      > only 30-35% of contracts that actually expire worthless.

30-35% vs. 75% is a big difference and that, evidently, is what makes this such a big option myth.

Here is another post on the subject:

      > It comes in several flavours, sometimes stated as 80%,
      > 90%, or whatever. It is the maxim that most options
      > expire worthless. It is repeated so often out there
      > in the marketplace, it is taken as a given and used as
      > a justification to be a nett [sic] seller of options and/or
      > promote option selling @education”. It is repeated,
      > as a mantra, by some of the most well known folks in
      > optionland. There is only one problem, it’s bullshit.

Love it! It’s a compelling argument, too. I found a forum post from 2008 that read:

      > Summa is a proponent of selling options, so at the
      > very least he has a vested interest in putting forth
      > the conclusions of this study which has lent
      > credence to his book for years.

So if it is indeed “bullshit” then now we have an underlying motive for his writing it in the first place…

Do Most Options Expire Worthless? (Part 1)

In my opinion, one of the more devious option myths of all time is that most options expire worthless.

Based on my research, here is an article detailing the original findings. You can also do an internet search for the author’s report entitled “SELLERS VS BUYERS: WHO WINS? A STUDY OF CME OPTIONS EXPIRATION PATTERNS.” In this blog mini-series, I will therefore be talking about the article and the report, respectively.

I will start with the report since it was written one year earlier in 2002. From the introduction:

      > Three key patterns emerge from this study: (1) on average, three
      > out of every four options held to expiration end up worthless;

Jumping ahead to the conclusion:

      > Data presented in this study comes from a three-year report
      > conducted by the CME of all options on futures traded on the
      > exchange. While not the entire story, overall the data
      > suggests that option sellers have an advantage in the form of a
      > bias towards options expiring out of the money (worthless)
      > [italics mine].

I will now take a closer look at the article, which begins as follows:

      > While there are certainly many viable options-buying strategies
      > available to traders, options expiration data obtained from the
      > CME covering a three-year period suggests that buyers are fighting
      > against the odds. Based on data obtained from the CME, I analyzed
      > five major CME option markets… and discovered that three out of
      > every four options expired worthless….
      >
      > …Three key patterns emerge from this study: (1) on average, three
      > out of every four options held to expiration end up worthless;

Scrutinize these passages very closely. Do you see any difference between paragraphs of the the report/article? Do you see any difference between the content of the report and the article?

In the next post I will detail the mythological aspects of this content.