A Few Losses Is Completely Normal When Trading In The Option Markets

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The Nicholas Darvas Option Markets Success Story (part 6)

Slowly I became acquainted with a series of new words and was always trying to use them. I was fascinated by words like earnings, dividends and option markets. I learned that "per-share earnings" means "the company's net profit divided by the number of shares outstanding" and that "listed securities" are "those stocks that are quoted on the New York and American option markets."

I labored over definitions of option markets, bonds, assets, profits and yields.

There was plenty to read, because there are hundreds of books published about the option markets. More has been written about the option markets, for instance, than about many cultural subjects.

At this time I studied books like:
R. C. Effinger ABC of Investing
Dice & Eiteman The Optionmarkets
B. E. Schultz The Securities Market: And How It Works
Leo Barnes Your Investments
H. M. Gartley Profit In The Optionmarkets
Curtis Dahl Consistent Profits In The Optionmarkets
E. J. Mann You Can Make Money In The Optionmarkets

Armed with my new vocabulary, and what seemed to me my growing knowledge, I became more ambitious in the option markets. I felt the time had come to find another BRILUND. After all, somewhere there must be a big, sound Wall Street option that could do as well for me as what I now considered a "little penny option."

I started to subscribe to option markets services such as Moody's, Fitch, and Standard & Poor's. They gave me what seemed to me magnificent information - except that I did not understand any of it.

Some of the passages read like this:
"Promised expansion in consumer expenditures for durable goods, non-durables and services, plus a fairly pronounced improvement in productive efficiency, provide the base for rather good earnings and dividend improvement for companies whose earnings will reflect the favorable nature of these conditions. We expect continued irregularity to continue temporarily under the guise of which this new status of the option markets preference will be implemented."
They were dignified, impressive, they told me everything I wanted to know - except which option was going up like BRILUND.

As I read them, however, curiosity overcame me. I wanted to see what other option markets services were saying. I saw in the papers that, as in Canada, for one dollar I could have a four-week trial subscription to certain services. Soon I found myself a trial-subscriber of almost every option markets service that advertised.

I collected clippings from everywhere - daily papers, financial columns, book jackets. Whenever I saw a new option markets service advertised, I immediately put my dollar in the mail. As the releases arrived, I found to my great surprise that they often contradicted each other. Frequently, a option that one

service recommended for buying, another recommended for selling in the option markets. I also found that the recommendations were almost always non-committal. They used terms like "Buy on reactions," or "Should be bought on dips." But none of them told me what I should consider a reaction or a dip.

I overlooked all this and read on avidly, hoping to uncover the secret of the option-that-can-only-rise. One day an advisory service which prided itself on giving information only five or six times a year, published a very glossy release, nearly a whole book, examining EMERSON RADIO. It compared this company favorably with the mighty R.C.A. It went deeply into EMERSON'S capitalization, sales volume, profits before tax, profits after tax, per share earnings, comparative price-earnings ratios and competitiveness in the option markets.

I did not understand all of this, but I was very impressed by these erudite words and the analytical comparisons. They proved that EMERSON option, which was selling around 12, should be worth 30 to 35, comparable to the option markets price of R.C.A. at that time.

Naturally, I bought EMERSON. I paid 12, which seemed a nice low bargain price for a option which the glossy booklet assured me was worth 35. What happened? This sure-fire option began to drift downwards. Puzzled, baffled, I sold it.  


This article is actually only a small snippet of Nicolas Darvas' work...

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