Options Investing Lessons from Bernie Madoff
Options Investing: In another post, I commented how I do not feel very sorry for the “victims” of Bernie Madoff. No one forced these people to give him their money. They did so out of greed. Yes, he was a con-man and the system should have caught him long before, but if they want to blame anyone, they should look first in the mirror. Especially those that gave him all of their savings.
Different types of investments and trading
Am I a monster? Hardly. I feel bad for the people who are in hard times through no fault of their own. Like the story I just saw on NBC about the family in Fort Meyers Fl who bought a condo in a new development. With more than 300 units in their building, they are the only occupants. All the other units are empty. The builder has cut off power to most of the building, maintenance, and security. The builder has offered to move them to the next tower, but their lender, Chase, said they would not transfer the mortgage to the new unit. These people are stuck with no money to move somewhere else and no way to sell their current condo. That’s a horrible situation to be in.
This recession had taught everyone a lot of lessons. I just hope that we all do not forget them. Let’s review some of what we learned from Madoff.
Options Investing Lessons from Madoff
1. Never invest all your money in one place. I know that Warren Buffet says to put all your egss in one basket and then watch the basket very carefully. But he also says to only choose the basket after doing very complete research. Most people don’t have the time to do the type of research Buffet suggests. So spread the money around. Stocks, bonds, metals, selling options, real estate, cash and others.
2. Know where your money is. Many investors gave their money to a hedge fund which invested with Madoff. In this case they did not lose everything. But even still they should have known where their money was. Ignorance is no defense.
3. Understand your investment and investing. I sell and trade options. And with options you can have very nice above average returns. But there is also the possibility of loss. Above average loss. Before you buy or sell anything, you must know what it is, how it works, what your risk is and when and how you will get able to get out.
For example, when someone becomes a member of my site, I tell them to paper trade along with me for at least a couple months. I have had members lose money on trades because they entered their orders incorrectly. If they had paper traded they would probably not have made such elementary errors.
Many of my members are attracted to my site because of the better than average gains. But some of them tell me they want better than 10% a month returns. Others feel that 10% monthly is a decent return. These people are living in a fairy tale. 10% a month is AMAZING! Hedge fund managers would sell their first born for one year with 10% monthly returns. Yet some members think that it is only decent.
4. Be in control. I feel you should be able to get your money out of an investment when you want. This is called liquidity. Only invest in liquid markets. Even if you are new to real estate investing: you should only invest in properties that can be sold relatively quickly.
If anyone appraoches you with an investment in which your money is tied up for months at a time, make sure you can afford to lose that money. Because you just might lose it all.
5. Stay on top of it. Remember that you have worked hard your entire life for the money you have. But earning it is not enough. It is time for your money to work for you. For that to happen, you must be financially educated enough to know how to make it grow.
New to the realm of options investing and options selling?
If you are a reader of my blog you are already more financially savvy than 90% of the population. Kudos to you. But there is always more to learn. Stay on top of your investments and they will take care of you.
Ignore your investments and you will end up giving them away.
Got questions? Please let us know in the comments section and please go check our previous blog posts for useful stock option trading strategies,
Also, please browse our products and training section and follow us on Twitter to get more option selling updates.
THANKS FOR ALL YOUR WORK AND EFFORTS. I LEARN FROM YOU BUT THE PROCESS OF WRITING THE ORDERS IS QUITE A BIT FOR ME,A BEGINNER.
YOU HAVE A GREAT SITE WITH ALL THE CATEGORIES,ARCHIVES, LINKS, ARTICLES ETC…QUITE RICH IN CONTENT!
You are correct. Just lost $220K in 2 supposedly conservative investment plans.
Needless to say, I now trade/invest for myself.
Ponzi is alive and well!
I would imagine that you (OG) can only make 10% on the amount of money you actually put at risk during a month – and that’s what the 10% figure really means (there is a difference).
If you had a $100k size account and were willing to risk 1% per trade and you did 10 trades during the month, you would earn $1000 which is only 1% not 10%. The reason for this is it is hard to find enough good setups to get your money working for you in full when you’re only willing to risk 1% but that’s smart money management.
Just think of it. With 100k account size and using 1% risk, you would need to do 100 trades during the month to make 10% on your total account balance. I doubt that ever happens. But what probably happens is you use a higher risk % like 5 or maybe 10. I don’t think that’s good either.
You dont need to limit yourself to 1% of your capital in one trade. I am not day trading and the money management does not work the same way. With the high probabilities it is very easy to invest $100k in a handful of trades. In fact I would not trade more than 5 or 6 a month no matter how much money I had. With options you can protect and hedge yourself.
As I heard Buffet say at one of the meetings “You can put all your eggs in one basket. I would. Just make sure you know what you are investing in and watch the basket.”
The most telling lesson from the Madoff sleaze is that, when dealing with pecuniary assets you can trust no-one. There were ‘friends’, investments made on ‘religious affiliation, close acquaintances and I think, even close family members who were scammed.
Your site is the best I have been affiliated with since embarking on the Options trading journey. I became interested in spread trading via a course from (name removed). The videos were very informative, but like every other course, it seemed to pay too little attention to adjusting/managing trades (that was mentioned quite a bit, but not at all explained thoroughly enough). Then, I saw (name removed) site, which emphasized weekly options. Again, (name removed) failed to address adjustments and management.
Your site really does a great job in the trade set-ups, and you do well at letting us know when to pull the plug. I have done quite well with your advice, and ventured into my own trades as well each month. Would you provide some additional insight to us members (I know you once posted to a non-member about not revealing your trade selections for free) about specifically how you choose trades, and also some more examples of possible adjustments for vertical and iron condor trades? My worry is that when you decide someday not to do this, what am I going to do without that golden knowledge? Thanks, Jeff Ps. Keep it up!!!!
Thanks for your comments! I am glad to see you are doing well and learning. We had to remove the names of the two companies you mentioned. We used to leave the names in the blog but then other’s threatened to sue us so we decided not to have any names or links in the blog.
There is lot of material in the members section about how I choose the trades and what I look for in a stock. Mainly I look to trade the same handful of stocks, etfs, indexes and become familiar with their movements over time. I want large, liquid, stable ones that dont jump around too much. Most DOW stocks are good candidates. Defensive stocks like consumer staples are also good ones to play. And we are working on more information on how to trade butterflies and calendars like you asked for.
Bernie was a bad person
People are greedy, and you have to understand who you are investing with. People sometimes make mistakes and let greed get in their way. Bernie was giving alot of people good returns, and word got around. Don’t feel sorrow for all the investors, because of greed. Monty
Greed is alive and well, and as people try to acheive a “short cut” to riches there will always be greed. As a former stock broker,I trade options to acheive a 30 – 40% annualized return. Time is you friend, always remember that! That is compound interest, dividend reinvestment and SELLING options. Do research, NEVER stop learning.
Appreciate the reference to the Madoff article.As I had posted to you yesterday, I am extremely analytical and look to understand and access the risk factors of any option trade,through your service.Once I have this understanding any investment I would make would be solely my decision and my responsibility,without recourse, win or lose!
Good advice Allen,… be prudent, don’t bet the farm, etc.
Thanks, Allen, for the very good advice. I invested in a Ponzi scheme in Australia and lost a lot of money. But it wasn’t a Ponzi scheme when it started and I did make some money for a couple of years. Lost about 30% over 2 years in all. IT WAS ALL MY FAULT: NOT THINKING. Like you, I have no sympathy at all for Bernie’s victims, or myself. Now I’m following your trades on paper for a month. Very interesting. Your advice so far has been judicious. We will have more proof on Friday! Like the correspondent above, I would appreciate more advice on screening stocks, Etf’s and so on, for possible spreads and condors. I’m looking for a solid 5% each month and I think it’s possible, with adjustments when necessary. You are one of the few sane and honest workmen in this profession and we all value your advice highly. My best, Keith H
It’s alright to lose some money or make some money, the most important thing is that we are having fun when we do the options trading. It entertains us when we set up the strategies, right! It pumps up our adrenalin when making money, and restless when losing money. Just think of it as an entertainment.
Allen, I enjoy reading your informative e-mails. If I decide to have you auto trade for my account, how can I expect to make the 5-10% per month you’ve mentioned in the past, is that an average expectation over what length of time?
I mention this because you’ve also mentioned that one can expect to experience losses in the account over time.
There is no gaurantee.
So I cannot say what the performance will be.
We also have not kept strict records on the autotrade fills. Most trades are filled at the same price I get. Some are filled a little better, some worse.
That is why autotrading is used only as a tool and not a substitute for a money manager. If you know the trades, than you can keep an eye out on the autotraded trades and change/adjust/exit if you feel like doing so.