How To Effectively Handle Any Broker

How To Effectively Handle Any Broker: Secrets to Getting Started In Options

By Karim Rahemtulla, Advisory Panelist
Tuesday, August 9, 2005: Issue #232

You’ve never seen this written anywhere, but if you’ve looked into trading options, you’ve heard it, even if phrased with devious politeness…

“You don’t have a clue about options. For that matter, you don’t have a clue about investing.”
“I do. I am a broker. To get to where I am, I had to pass an exam, on my third attempt. And, now I can tell you if you are qualified to trade options.”
“What? Don’t you get it? You don’t understand money unless you are a broker. Oh, by the way, if I screw up, then you MUST use arbitration (run by a committee of insiders who love my company) to try and recover any funds from me…”

If nobody ever said those exact words to you, be sure it’s exactly what 99% of brokers think. That, in my opinion, is what the disclosure SHOULD say at the bottom of every stock and options agreement that you must sign before you can trade. And you might even throw in this:

“Good luck, and thanks for leaving your hard-earned money with me to control – and, of course, collect a piece of – every time you decide that you know better.”

Fact is, I talk to people all the time at trading conferences (like the one I’m at now in Vancouver) who have yet to trade their first options contract… If you’re in their position, today’s report could save you some serious grief getting started. But even if you’re an experienced options trader, I’ll reveal how you can more effectively handle any broker.

Let’s get right to it…

You’re Bright, Rational and Have the Money… Not Enough!

You would think that a 50-year-old person of sound mind and body with 30 years of investing experience would know more than an 18-year-old just out of high school.

But, no, brokers are often in a position to say that YOU just may not be “suitable” to trade options. And while there are good brokers out there, the majority of brokers are just not qualified to determine your suitability to trade options.

Yet they do, and on a regular basis…

The suspicion that every customer is incompetent is a rampant myth in the brokerage world.

It’s rather like getting that first job. To get one, you have to prove you’ve done well at your last job, so you have to get a job to get a job! If you have never traded options before, you may not get the chance to participate in this emerging market until you can prove you’ve participated before.

The Process Begins With You on the Defensive

Here’s how it works: In order to trade options, you must fill out an application. The application asks you pointed questions. And, unless you answer that (1) yes, you are willing to lose everything and (2) you won’t get upset if you do and (3) you won’t sue the brokerage firms regardless of how negligent they are, you’re in trouble. Chances are you will not be allowed to trade any options except covered call plays.

Okay, so I am exaggerating a bit. A little bit. In reality, the options agreement is reviewed by each firm’s options department to see whether you should be allowed to trade different options strategies. You may be able to buy puts and calls, but not engage in straddles (I’ll explain a straddle in a later issue.)

But more likely, as a beginning options trader, you may not be allowed to do anything except trading covered calls. Why? Because there is absolutely no risk to the broker if you are trading against a stock you already own.

At the start, your chances are best if you have had a regular account for a while, have plenty in it and are willing to sign the form saying that you are willing to lose money and understand the risk.

Some brokerages make it hard. Others make it easy.

So, You Wanna Be an Options Trader…

But ask yourself this question: “If I’m squeamish about playing options, do I really want to do this?” Options are higher-risk than stocks. When you buy a stock and it goes south, at least you have your shares and can unload them to recover part of your money. Very few stocks go from good to zero in a day. But options can.

Think hard about how much risk you can stand. If you can take a little bit of a hit, then the broker is probably right. Covered calls are probably your best strategy.

But what if you’re all set to go mentally and the broker still stands in your way? Then you have to take charge. I’ll tell you how to get around this hurdle in the next report…

Good trading,

Karim