A LOT OF NEW investors are playing a dangerous stock market game. They're speculating in options -- betting that stocks will keep going up.
So far, they've been lucky. But eventually many innocents are going to face what Wall Streeter Ray DeVoe calls the Crack of Doom. That's the day when you know, for sure, not only that you are going to lose money but that you are going to lose a lot more money than you can afford.
Some of these speculators appear to be taking lessons from Wade B. Cook, a former cabdriver whose "Wall Street Money Machine" is a best seller in the business book class. It tells folks how to get rich quick playing stock market options.
At nearly 400 seminars this year, Cook wannabes will pay as much as $4,695 a pop to learn the master's secrets -- among them, his formula for producing what he calls "sane, safe and comfortable 20 percent to 40 percent monthly returns."
Sane? Cook tells me his definition of sane may differ from mine, because mine is boring. I guess he's right.
One thing probably not taught at Cook seminars is his interesting history over the past 10 years: a current, informal investigation by the Securities and Exchange Commission (he says there's nothing to it), a Chapter 7 bankruptcy (discharged) and cease-and-desist orders in several states for selling unregistered securities (he says he didn't do it).
Arizona hit Cook with a $150,000 penalty for misrepresentation and fraud (not yet paid), plus an order to repay nearly $391,000 to a group of investors (Cook says he intends to pay double).
Why are options so appealing to investors today? If the market moves in your direction -- a big if -- you can ring up a large percentage gain on a small investment.
Say you buy a call option on a particular stock. You're betting that the price will rise by a certain amount over a fixed period of time -- a few weeks, a few months, or even three years. This has been a pretty good bet for some 18 months. Stocks have risen, so a lot of options made money.
Some enthusiasts even subscribe to services that page them the moment a corporation announces that its stock will split. When their beepers beep, they dash to a phone to buy calls on the stock, on a bet that its price will rise.
When stocks split, they commonly divide in half. One $80 share becomes two $40 shares. There's zero change in the company's economic value. Even so, the stock often rises -- maybe because it attracts more buyers; maybe because stocks split when companies expect profits to improve.
But only in this helium market would grass-roots investors assume that the price will always move high enough, fast enough, to cover the cost of the option plus sales commissions. If it doesn't, they risk losing every penny they put up.
Seattle financial planner Mark Spangler of MFS Associates says he just talked a client -- a divorced woman earning $60,000 -- out of playing the stock-split game. Spangler says the client told him, "It looks like it's guaranteed. You can't lose money on this."
Only one person is guaranteed not to lose money: your stockbroker. For a small option trade -- a buy and a sell -- you might pay 6 percent or so. If you do that every couple of months, you'll need to make a lot of money just to cover your costs.
Financial planner Mark Sievers of Sievers Financial Consultants in Fairfield, Calif., studied options in graduate school and wouldn't dream of suggesting them to most of his clients. Not so Wade Cook. His Web site brags that he'll teach you to double your money in "2 1/2 to four months."
Don't count on it. When the market turns will be the day the beepers die.
Pub Date: 9/22/97