Martin Lee @ Sg
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Risk Free Options Trading Strategy

I was at a seminar preview yesterday where the presenter was trying to sell an options trading strategy as part of a investment course.

The options trading strategy was supposed to yield about 2% a month and involved selling options.

The presenter even showed us screenshots of his actual trading account, which recorded all the premiums he collected from selling the options.

One part of the strategy was actually a covered call strategy, which was less risky than selling a naked call.

When asked about the risks involved in using such a strategy, the presenter mentioned that there was zero risk. Either you made money each month, or if you couldn’t make the trade, then you simply do not make any money in that month.

I think it’s a bit misleading as offhand I do know of at least one scenario that will lead to losses in using a covered call strategy.

My guess is that the presenter had not encountered that scenario yet as he had only been using this strategy for a few years, where the market had been mostly in an uptrend or sideways.

Singapore adopts a buyer’s beware approach when it comes to a purchase of an investment product. This is similarly applied when you sign up for an investment course. A buyer’s beware approach only works when the correct facts are presented.

Unfortunately, this is not going to happen all the time. You don’t even need to attend the seminars. Just open up the newspapers to see the claims that being advertised and you will know that some of them are just downright outrageous.

Leave a Comment:

Pok Chow says 10 years ago

It is really misleading to lie to the audience saying there is “zero risk”. The covered call strategy that you mention the presenter speak of really worked in the one way market! Considering he’s oblivious to the “risk” present, he must’ve not have a draw down yet, When he does, people who signed up will definitely be unhappy!

    Martin Lee says 10 years ago

    Dear Pok Chow,

    Welcome to my site. Yes, you are right, zero risk is simply not possible. When you don’t know what you don’t know, the risk would be even higher….

      Pok Chow says 10 years ago

      Thank you Martin:)
      And yep! Risk comes from not knowing what you do. And it’s really inconsiderate for that person to drag more people in with him/her.

Sleeper says 11 years ago

Hi Martin,

I see your point, but it is easier said than done and the devil is always in the details.

For eg. if government mandate that all claims of returns must be verifiable with evidence. They will straight away pick one lucky month & say “I made 15% in June” which is technically true & correct.

If government say at least 1 year, they can set up multiple entities and choose the 1 which makes the most & claim “my company made xx% last year!”

Smart people will spot such weasel claims straight away, but then they are not going to get conned in the first place. Those who are gullible enough to believe all this nonsense now will still swallow whatever crap hook line sinker.

At the end of the day it all boils down to some people just want to believe. No amount of facts & logic & regulations is going to stop them. Go to HWZ & check out the gold scams threads for a good example –people who got conned, monthly promised payment suspended and owed for a long time but still clinging on to hope that by signing up for scams with other companies they can earn back the loss.

    Martin Lee says 11 years ago

    Hi sleeper,

    I agree that at the day, it is the stupidity of people that gets them conned. But the use of mass media is helping to “feed” them to the sharks.

    Actually, there’s supposed to be a code of advertising.

    The rules for slimming and medicine are super strict to protect people.

    For eg, full substantiation for all new claims has to be submitted with a stringent process.

    Claims relating to baldness, hair loss, hair growth, etc.
    1.1 No advertisement, unless approved by the relevant government authority
    should contain any claim or implication that:
    (a) Baldness can be prevented or its progress retarded;
    (b) Hair loss or thinning of the hair can be arrested or reversed;
    (c) Hair growth can be stimulated or improved;
    (d) Hair roots can be fed or nourished; or
    (e) The hair itself can be strengthened or its health, as distinct from its appearance,

    So, it is really up to the authorities whether they want to do anything. This is something that is easy to enforce as there is no way you can get round the rules if you want to get it published in a newspaper.

durio says 11 years ago

zero risk covered call?! ohmygawd!
but does it comes with money back guarantee in event we lose $$$? ;P

Jackson says 11 years ago

How about self-purported educators offering their services as tutors? Or freelance job seekers positioning themselves as consultants? Or motivational speakers whose ‘specialties’ are not in areas of finance but instead life management? Should these all be regulated too?

    Martin Lee says 11 years ago

    Actually, the private schools sector is already regulated by MOE. There have been some calls to regulate individuals tutors (like having a registrar) but this is not quite feasible. In the area of finance, the reverse is true. Individuals are regulated, but mass education is not. Perhaps all private schools (no matter what topic they teach) should fall under the purview of MOE? 😉

sonje says 11 years ago

Can a covered call option strategy be used un the singapore stock market context? There seems to be only structured warrants in singapore (which cannot be sold to receive premiums)

    Martin Lee says 11 years ago

    Dear Sonje,

    you are right, there’s not much choices for options for Singapore stocks. The only options market that I know of are options on the SIMSCI. Even then, the spreads are horrible.

Createwealth8888 says 11 years ago

What is the risk of insurance company collecting premiums by selling HDB Fire Insurance.

No “risks”?

Same argument. Right?

    Martin Lee says 11 years ago

    Dear createwealth8888,

    the risk is in collecting too little premiums and not having enough to payout when the fire eventually occurs. It is not a matter of whether the claims occur, but when.

    To put it in the context of an options selling strategy, you can make small gains for an extended period of time, but the time will come where you have to take big losses. Those who are not aware of this might be mislead into thinking there are no risks involved.

Sleeper says 11 years ago

There is not much the government can do to help protect people from their own stupidity.

It is public knowledge that the best people like Warren Buffet or George Soros average at about 20% annual. A quick google shows some of the world’s best performing mutual funds averaging at 14% – 16% over extended periods. I read on Bloomberg that Asia’s best performing hedge fund manager Dymon averages also at close to 20% returns.

With this kind of easily available public knowledge, if someone still want to believe some dubious fast talking guy in a lame dingy auditorium is willing to share his “secrets” on how to make 2% per month if you just pay him a few thousand bucks, then quite honestly they deserve zero sympathy.

    Martin Lee says 11 years ago

    Yes, there are things that a government cannot do, but there are also things that they can. For example, they can enforce a code of advertising for such events, just like how they enforce a code for medical professionals.

    There will also be people who might not be so financially savvy with the kind of investment returns that are normal.

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