Bill Cara makes an analogy between guns and options – like guns, options can be use for aggressive or protective purposes, to manage risk or to incur potentially enormous risks. – Ilene
Cara’s Commentary & Community Chat, Sat., Apr. 25, 2009
Courtesy of Bill Cara
As an extensive user of put and call options, my trading team is able to effectively manage accounts that run the gamut from the most conservative to the most speculative, in the most volatile market conditions, just using equities of several Cara 100 companies.
I often say that, based on equity derivatives of a single company like IBM or Exxon for instance, I can meet the needs of clients who otherwise would be invested in anything from low-risk bonds to high-risk penny stocks.
Just like a gun and bullets can be used for aggressive or protective uses, the same can be said for equity options. Are they risky? A soldier would not call a gun risky. In our hands, an exchange-traded option is a tool, one that we need to do our job. We use options, in part, to manage risk, so they are not risky.
Since I am not a bank or broker-dealer, I have no internal politics to protect for departments like fixed income, equities, corporate finance, and so forth. I am free to spend all my time analyzing factors that affect market prices and to work on strategies and tactics that best allow me to control the performance of my portfolios. I’ll repeat: options are not risky. Equity options, in fact, are my preferred tool.
Since I do my work in a virtual world, based in a tax-free jurisdiction, I would in fact, if it were not for the rules and regulations of capital markets that heavily favor banks and broker-dealers, hold the unfair advantage over my competitors. My costs to operate are vastly lower, and my expertise is as good or better; so, at the end of the day my returns ought to be superior. I only wish, however, that I too could observe the public’s order flow, or that of governments and central bankers because, in that case, there is no way, I believe, that my competitors could win.
You might say that I do anyway hold a net advantage, and judging by the comparative performance of clients of banks and broker-dealers, you are probably right. That is not to say trading is easy; it is definitely a challenge to anybody who trades, amateur and professional alike. Part of the reason, of course, is the vast amount of deception that is organized by few and perpetrated on many, including you and me.
Organized deception is the reason why we must always be on the defensive, paying an opportunity cost to the system, or at least to the reprobates who run it. I am concerned there is no hope for change.
Alas, I have no confidence that the Obama Administration will treat this problem any differently than previous administrations. After 100 days in power, I can see no change as promised. I can see that the same people operate inside the White House and in the shadows, surrounding whoever is elected President.
So, until that dynamic is changed, there will be no change with respect to the lack of fairness and the extent of fraud within the financial services and capital market arenas. That’s most unfortunate. It’s also the reason I no longer listen to the grand oratory of the current President, and spend all my time with my head down, doing what I do best, trading options, and making profit.
Outside of my trading, this has been a heartbreaking week. Just getting by, as I say; I live my own version of “La vita è bella”.
http://en.wikipedia.org/wiki/Life_Is_Beautiful
