For a long time I’ve been really depressed that I’m unwilling to be a cheat or a swindler, Lenny Dykstra doesn’t have that problem. Well, actually he could be honest and just extremely stupid. You decide which is worse.
Here’s my dilemma. I know a lot about the stock market and even more about options. If you put me in a room with 50 guys hawking stock systems, I could tell you in detail why each of their strategies was completely inane and something only a pure ignoramus would choose to do with their money. But I have nothing to sell!
It’s like hair growth products. I can sadly tell you that buying Rogaine is a really expensive waste of money. I can tell you how hair plugs eventually leave you looking even worse than you did originally (the rest of your hair falls out and the plugs remain and look like little lost pubic hairs). I have no idea how to deal with baldness, I wish I did, but again I have nothing to sell. People that are flat out wrong or swindlers have stuff to sell. You can’t sell educated cynicism.
A couple years ago Lenny Dykstra started to give stock picks on Jim Cramer’s web site TheStreet.com. Here was the pitch that Cramer gave at the time. “Remember Lenny Dykstra? Didn’t you think he was a complete moron? Me too, but guess what he went out and learned a lot about the stock market and now he’s a really great stock picker!”
How much time did Dykstra spend on his pursuit of equity expertise? According to Cramer, “A lot!” And how do we know that he is now a great stock picker? Because Jim Cramer, the really loud guy on CNBC, who seems to think he’s John Madden announcing Monday Night Football says so!
Yes, the same guy, who vehemently told you to keep your money in Bear Stearns stock before a three day period where it lost about 90% of its value.
Here’s Lenny (and Jim’s) scam. You pay $799.95 and Lenny will give you his “Deep in the Money” option recommendations. It’s sort of like a gambling hot line, but actually it’s a thousand times less intelligent than those services.
Here’s Lenny’s strategy. He finds a stock that he thinks is going to go up and then tells you to buy 10 “Deep in the Money” options. When you make $1,000 you get out. Simple!!!!
Notice that Lenny doesn’t really care how much the stock is trading for just that you make $1000 on your 10 options.
In Google, which trades over 500 dollars a share, this may happen in a matter of seconds. In Sirius, which trades under 3, this could take 2 years even if Lenny is 100% on the money with his pick.
What do you do if you never make $1,000? Lenny doesn’t seem to consider this to be a possibility.
But the possibility of being wrong isn’t the biggest reason why Lenny “Nails” Dykstra is a complete ignoramus. It’s the bid ask spread.
Lenny wants you to buy 10 “Deep in the Money” calls. Well, anyone who understands options knows that aside from a small insurance premium (the out of the money put). Buying 10 “Deep in the Money” calls is the exact same thing as buying 1,000 shares of stock.
Let’s look at a concrete example.
Apple stock is currently trading about $180. The bid ask spread in Apple is usually a penny or two wide. It’s essentially negligable.
If “Nails” likes Apple, he might tell you to buy 10 “Deep in the Money” Calls – probably the 150 strike.
I’ve traded options for over 15 years. These markets are the least liquid option markets that exist in the universe.
Chances are that the market in these calls would be 30.5 – 31. This means you buy your ten options at 31. You’re essentially buying 1000 shares of Apple at $180, but you’re doing it in a market that is 50 cents wide instead of a penny or two wide.
If I buy 1000 shares of Apple for $180 and sell it for $181. I will make Lenny’s golden grand.
If instead I buy the 150 calls for 31 and Apple stock rises by $1
The likely new market in the calls will be 31.5 – 32.
The entire market went up a dollar but it’s still 50 cents wide. If I pay 31 for my calls, I can really only sell them now for 31.5. That’s only a $500 dollar profit. Just buying the stock is a million times smarter.
If fact, you likely won’t be able to realize $1,000 with this strategy until Apple rises to $182.
But of course, we could have made $2,000 just buying the stock.
Meanwhile, possible loss with Lenny’s Strategy = $31,000!
I’ve left out some things about puts to make this simpler, but the corresponding put markets are usually a nickel wide, not 50 cents wide.
Lenny and Jim are either stupid or corrupt, and just like Robert Deniro said in Casino, “either he was in on it or he
was too dumb to see what was goin’ on. Either way, I cannot have a man like that working here. . . He’s weak. He’s incompetent. He jeopardizes the whole place.”
I challange Jim or Lenny to debate this with me live on CNBC in front of any option trader alive running more than a 20 million dollar portfolio (there a thousands of them). If that person disagrees with me that Lenny is a complete ignoramus – I’ll hand Lenny $799.95 in cash live on the air.
The chances of that happening are infinitely worse than the chances Lenny’s ex teammate, John Kruk, had of making contact with one of Randy Johnson’s pitches in that famous at bad during the 1993 All Star Game
Tim McCarver: No Chance!