Can You Get a Fair Deal in Stock Options Trading?

Crime Scene Investigation

Crime Scene Investigation

This news story about two allegedly crooked data analysts at Capital One made millions of dollars in profit and an 1800% gain in value on shares of stock they bought and sold in just over a year. The analysts tracked Capital One credit card users’ purchases and bought or sold stocks ahead of the earnings reports of publicly traded companies.

You know, people who get this greedy must honestly believe they are too smart to get caught. I cannot imagine that I would do anything like this, but I would not have saved so much data on company computers and I sure would not have wanted to make millions of dollars right away. That will obviously draw some attention to what you are doing.

Options trading, like all other securities transactions, is supposed to come with some risk. It sounds like these guys were able to eliminate most if not all of the risk. It was kind of like having a time machine that allowed you to peak into the future.

You don’t have to be a data analyst looking at credit card users’ purchases to get inside information. This Houston-area PR company CEO went to jail for using the information his clients gave him for release to the public. He bought and sold options before the press releases he handled went public, so he was able to get in on the action before everyone else. He only made a few hundred thousand dollars in three years, but that is still illegal.

Options trading is becoming a big business. Every month I see new features coming online for traders, many dealing with the options market specifically. I don’t know what is driving all the interest in options but you really have to do your homework to make sure that A) you are not doing anything wrong and B) no one is taking advantage of your good faith.

Of course, most of the people in the financial services industries are pretty honest. Their families are depending on them to stay out of jail. But when it comes to making investment choices you want to be careful not only about who you do business with; you want to be careful about who you do business through. Each trading firm may charge you differently from others for some services, and you want to know what you are getting into.

Reading up on reviews of options trading brokers is part of the due diligence process. Of course, you have to take online reviews with a grain of salt. They may be compensated in some way. Some people say that if a reviewer chooses NOT to review a broker that is like expressing an opinion, so just because a reviewer only seems to write positive reviews doesn’t mean they are not helpful. But I think you should run the broker names through a news search to see what turns up. If the broker is recently associated with an investigation or scandal you might want to look around some more.

Not every investigation leads to some sort of charges or lawsuit. But when you see a news story like this you need to stop and think about what it could mean for you if the allegations are true. If you feel like you won’t be affected then maybe you can go ahead and do business with a company. Just know what you are walking into. That is all I am saying.

I think you can get a fair deal most of the time. But part of the risk of trading in a very active market like stocks and options trading is that you may eventually run into someone who should not be there. Protect yourself and keep a diversified portfolio no matter how good the deal looks.