A recently published study on details of options trading events surrounding mergers and acquisitions compellingly argues (on the basis of statistical analysis) that as many as 25% of all mergers and acquisitions involving publicly traded companies may be accompanied by options investments from people with inside knowledge. In other words, the study suggests that insider trading (which is illegal) is rampant in the business world.
Today if you mention insider trading to people many will think of Martha Stewart’s five-month prison sentence for selling less than 4,000 shares of stock in pharmaceutical company ImClone the day before its stock crashed. ImClone and its investors were hoping a new drug would be approved, and approval never came. Stewart lost credibility with consumers over a potential $45,000 loss on a single investment at a time when she was worth hundreds of millions of dollars. It is difficult to understand why someone so wealthy would risk so much.
Risk, however, is part of the game. Those who build their own wealth are often risk-takers and risk-takers dance on the edge of disaster with abandoned glee. They are confident in their own success and build success with their confidence. And that comes from “being lucky”. Luck, in fact, is built on your belief in your own luck. The subconscious mind is more open to new opportunities if the conscious mind believes in its own luck.
Investors need to be confident in their decisions like everyone else because without a disciplined approach to investing you increase the risks you take while decreasing the probabilities of those risks providing a sufficient return on your investment. Thus, it should come as no surprise that some wealthy people take advantage of forbidden knowledge to increase the returns on their investments: they are making their own luck by taking risks, even if they don’t consciously see it that way.
In the world of options trading you can learn from a mentor or learn about options trading on the Web. Websites may be packed with brilliant information based on hard core research but at the end of the day they lack the intuitive gift that experience and confidence bring to the table. In fact, various laws hold Website publishers accountable for what they say but there is no law that protects you from being too arrogant and cocky. In the investing world you are on your own when it comes to battling your ego.
Of course, insider trading is not the only way that fraud creeps into the options investment game. Some brokers may break other laws by misusing investors’ money. If you as the options trader pay a broker to buy equities on your behalf and those equities don’t appear in your portfolio right away, you need to ask some hard questions. Be suspicious if you don’t hear easily confirmable information. If your broker is not responding to your inquiries or not directly addressing your concerns, you should take appropriate action to protect yourself.
That’s not because all brokers are bad. There are many law-abiding brokers. It’s just that you don’t know if or when your “luck” will change and your broker stops acting on your behalf. Temptation is strong and investors have to trust their business partners. Yet as the old saying goes, “Trust in God but tie up your horse”. You’ll be happier in the morning for abiding by that wisdom.