Discussion:Options Trading - client wants to do it as a business

Please help me -- I'm trying to convince him to run away from any such notions.

It's a risky business. I have some clients that day trade for a living. Their accountants tried to tell them that it's too risky and they found a new accountant.

I use the word "exit" and "dump" to give some indication of where I think the market is going once the Fed. begins to raise interest rates: straight down.

The only reason the market is doing "well" now is that we have devalued the dollar to such an extent, the market appears to be going higher, whereas in fact, the dollar you see today represented in the market averages is not the dollar lost after the crash, it's worthless (politely, I'll settle for worth less). If it's worth less, it takes more of them to buy the same thing, and the nominal values of the market averages go up. Worthless paper chasing worthless paper.

I understand I'm talking shares, and you're talking options, but it's just to confirm that it's a dangerous market right now. This is not the time for amateurs to enter the fray.

IF the market continues to go up in this environment, it will only be a further indication that our currency is becoming less and less valuable, not that our economy is strong.

Do your best, but you can't reform a gambler with facts.

2. You are playing against pro's who are hedging for major producers and speculators for hedge funds. They have the decided edge on inside information. The have lightning fast access to that information and to getting in and out of contracts.

3. The contracts are typically for $100,000 of a commodity. The small swings in the underlying commodity, can mean 5,000 win or loss. Losses that exceed your account balance have to be made up, or your contract will be sold. Your guess maybe right in the long run, but if you cannot hold on by pumping more and more cash - you loose.

4. There are no downside limits. You could be out $100,000 or worse in the blink of an eye. Stops and other safety nets cannot be fulfilled when the market plunges. Suppose you bet oil will drop and terrorists blow up a major Saudi pipeline. Oil spikes to $5/gal. When your broker finally is able to sell your contract, you owe a $100,000. The next day they find the pipeline damage is not as bad as thought and oil drops to $3/gal. The hedge fund guys were betting that oil would gain. When the price spikes, they switch sides and buy your sell-contract and ride it back down for another profit.

5. The hedge funds and producers love to see fresh new meat money in the market. They have spent millions in computers, trading software and information sources. The speculators and the hedgers are well matched, so they trade money back and forth - million dollar swings are nothing. They eagerly await bright eyed newbies who will get their noses bloodied and leave their cash on the table.

You'll probably not be able to stop your client, just try to limit his losses to something he can afford. Set a limit as to the most he'll loose.

It sounds like he's bored with his S-corp. Loosing it will give him an opportunity to start a new business - from scratch.

Option trading is generally safer than commodity trading.

It does take longer to loose money.

The question to ask is: What makes this person think he can take money away from a professional? Does he posses certain skills, information, technology?

Or just good hunches. Do the options dice feel hot?