They just don't get it.
Meet Alicia, a very good friend and soon to be Harvard Ph.D. who recently decided to invest a portion of her portfolio using options.
As a honors graduate of McGill, Columbia University and now Harvard, her prowess as a mathematician was surpassed by few. Indeed, she was at the top of her game.
She is a savvy investor and quite honestly, understands how to manage a portfolio better than most professionals.
She was recently looking at a wonderful opportunity to sell volatility in the FAS Direxion Daily Financial Bull 3X Shares (FAS). With the underlying ETF trading at just over $13 she wanted to sell the Oct11 9 puts for roughly $.50. In options lingo - she wanted to sell far out-of the-money naked puts. Based on the Nobel prize winning statistical formulas now available to all investors in an easy to understand format, Alicia knew that the trade had over an 85 percent chance of success.
Moreover, selling a put is an extremely uncomplicated options trade. It doesn't get any more basic than buying straight puts and calls.
It involves risk, of course - but so does any financial move.
And, she was willing to risk the premium collected and risk another $.50. Based on her defined risk the stock would need to go down to $8.00 before it hit her exit point. The chance of that loss occurring - less than 10 percent.
Okay, I could go into the risk-reward scenario for this trade and talk about all of the math behind it, but my basic point is.
Unfortunately, with the exception of a few savvy options brokers, the financial industry would not allow Alicia to make the trade.
They didn't care that she was essentially a mathematical genius and that even though she was a novice to options she thoroughly understood her risks. They assumed she was too stupid to make the trade. Why? Simply because of the amount of money in her account and her limited exposure to options.
Basically the industry was telling her that it was not suitable for her to understand that she should create wealth based on sound investment strategies where you have over an 85 percent chance of success and less than a 10 percent chance to lose the risk defined. The trade was just too risky.
They assume she is too stupid to exit a position when her defined risk was met. As I stated before, while good options savvy brokers understand the benefits and risks involved in this type of trade, most brokers would never allow it to happen unless you had a huge account. Most brokers won't allow an investor to buy calls or puts without having to jump through hoops and that is shameful.
Now, these hoops aren't that difficult to jump through - in fact, they're pretty simple to overcome. But the mere fact that there are obstacles at all turns off most investors. Which means that if you have even a little bit of patience and diligence, you can tap into a powerful and lucrative asset class that most people won't even consider.
Don't let Wall Street tell you that you're too stupid.
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