Using option and future trading strategies can turn a modest stake into a fortune. In practice, most of these speculators wind up losing money

In the past decade or two, we’ve often said that low interest rates can buoy the economy, but they can also spur investors to make choices they later regret. The most vulnerable investors are those who never really got comfortable with the volatility and uncertainty of stocks, or who had bad experiences in the stock market and never figured out what went wrong.

Investors focusing on option and future trading strategies are often some of the most vulnerable.

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Understand option and future trading strategies to see why they are risky approaches to investing

Trading Canadian stock options can generate a lot of brokerage commissions, which is why some young, aggressive brokers recommend them for their clients. That’s despite increased trailer-fee disclosure and Canada’s full implementation of other disclosure requirements for the industry.

But with the increased competition brokers face, those clinging to stock options may drop out of the investment business. Or they could choose another specialty. The truth is that it’s  impossible to build a lasting clientele by trading options. That’s because they place their clients in investments that will almost certainly cause them to lose money.

Trading in futures is a long-established and perfectly legal way to bet on price changes in commodity, currency and financial markets. This attracts futures traders.

In theory, high leverage makes it possible to turn a modest stake into a fortune in futures. In practice, most futures speculators wind up losing money. Successful investors recognize that investing in futures is a form of recreation. You may do it for fun, but don’t count on it for profit.

Here’s what every investor should know about the types of option and future trading strategies around today

It’s easy to find promises of high yields today. Safety is harder to nail down. All too often, instead of using a healthy sense of skepticism to choose among investments now available, investors let wishful thinking creep into their decisions. Unfortunately, as business coach Dan Sullivan warns, “Your eyes only see what your brain is looking for.”

For instance, UBS Bank is a Swiss-based investment bank and financial services company with roots that go back to 1862 and the birth of the Swiss banking industry. As of 2018, the bank was said to manage the largest amount of private wealth in the world, and its clients included around half of the world’s billionaires.

UBS also happens to have a number of unhappy clients who invested in its Yield Enhancement Strategy (YES) program. The bank generally limits YES investors to those with net worth of $5 million U.S. or more. The YES program’s assets peaked at around $6 billion U.S. in mid-2018.

According to Jason Zweig of The Wall Street Journal, YES effectively borrows against the client’s holdings at UBS, and uses the proceeds to trade options. On page 2 of its 6-page account agreement, it says that YES is “aggressive and carries a high degree of risk,” and adds that clients could “lose the principal invested.”

That’s a fair statement about the risks associated with options trading, and it’s included in the account agreement. This creates what you might call a “can’t say you weren’t warned” situation for investors.

Without taking sides in the dispute, it’s fair to say that this is an example of what can happen when you invest without digging deeply and maintaining a healthy sense of skepticism. Many income-seeking investors find it especially unsettling when a dispute like this arises at one of the world’s biggest financial institutions—all the more so when it’s one that serves half the world’s billionaires. However, you could say these investors got off lightly.

I suspect we’ll soon start hearing reports of far more devastating results for vulnerable investors, due to today’s boom in so-called “alternative investments.” Many, many companies have gone into business in recent years to focus on this area.

Lots of these propositions involve futures and/or options trading systems, just like UBS’s YES program. The sales pitch will tell you that “this is your chance to earn high safe income”. It may go on to say that opportunities like this were formerly open only to the proverbial “rich and famous.”

The fine print will clarify that the promoter will endeavour to provide high, safe income. In other words, they will try to reach that goal, but can’t promise success.

Use option and future trading strategies and you can expect high fees

Participants in futures and/or options trading systems do at times make high profits, of course. That’s because futures and options give you access to high leverage, which lead to extreme outcomes. The outcome of any one trade is subject to a high random influence. However, random events tend to occur in bunches, so you’ll experience both winning and losing streaks.

Of course, you’ll pay high fees and expenses in both, regardless of results.

Use our three-part Successful investor approach and experience better returns on stocks than option and future trading strategies will give you 

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

Have options or futures ever led to significant returns for you?

What is your opinion on options and futures trading?