To all who will be Netpicks subscribers:
I have been trading according to some Netpick's picks last month. And luckily I did not do all their trades and hence did not lose
too much (I think some of their calls after the 10/27/97 mini-crash
are pretty much worthless). But here is what I see with this service:
(1) They buy calls (mostly) or puts options.
Profit is maded by large intraday fluctuation in option price. It is a
hit-and-run strategy. If you buy an option at 3, set the limit sell
target at 5, and if you are lucky, the option will temporary jump to
5 some day and trigger a sell and you have a profit of 2. So it is suicidal if you buy the option and forget to set the limit sell price, because it is very likely that if you miss the sell target then the option will tank to 2 or even below 1 the next trading sessions and you will lose money.
This presents substantial problems to netpicks subscribers:
(1) if there are enough subscribers who buy and hold the
recommended options, when the target sell price is hit, your order
may not get filled because there are too many sell orders at that
moment (everyone wants to sell at that price). The paper profit
you think you will make will eventually turn into an actual loss. This
also applies to buying options. If there are too many subscribers who
want to buy at the same time, your order may not get filled at the
desired price or you end up get filled at a higher purchased price.
(2) their profit calculation is based on their ideal buy and sell price and it is without including commission. Commissions can be
large and can eat up your profit fast. It is also very important to
find a good option broker since execution at the right price is crucial to option trading. Brokers who specialize in option trading have more expensive commission than discounter's(like Brown,
e-swab, etc). That is the price you have to pay for good execution.
In addition, like what I mention above, it is very difficult to get your orders filled at the price specified by Netpicks.
So the possibility of getting the kind of profit they claim is small.
You end up paying $75 monthly subscription fees anyway even though
you may lose money in actual trading.
(2) Option buyers always have the disadvantage of time working against
them.
As expiration date approaches, you lose time premium more rapidly
than the intrinic value gain in option if the underlying stock goes up. And netpicks are likely to buy options near expiration date and
thus risky.
There are many strategies in option trading other than just buying
calls or puts. Many of these can be more consistent in bringing
you profit than the hit-and-run strategy.
I am not sure if the statement "90% of all option buyers lose money" is true, but I think the chance of hitting big profits is comparable
to the chance of winning the lottery. The simple strategy of just buying options without hedging, I suspect in a long run, much of
the profit you made in the short term will disappear since the odds are against you.
By the way, you cannot paper trade their recommendations (like the 2 weeks trial) for the reasons listed above. You have to actually participate in the market to know the rules.
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