I WAS drinking iced tea at a Burger King outlet the other day when a woman sitting nearby showed me the course she was studying: Options trading.

TEXT/ GRAPHICS: LARRY HAVERKAMP AND MAROO

She told me: 'It's like stocks, but you can make money even faster.'

Options were also featured in last week's issue of The Sunday Times. It isn't easy. You have to learn about delta, gamma, vega and theta.

As the woman told me, the appeal is leverage. You can trade 10 to 20 times your capital, which amplifies the profits and losses by 10 to 20 times. It is life in the fast lane.

Futures and structured warrants are similar to options. All are traded on the Singapore Exchange (SGX) but the trading volume is low, almost zero.

Structured warrants - a type of option - solve the problem by permitting the issuing bank to act as a market maker. It stands ready to buy or sell to anyone who wants to trade.

That's a plus, but the downside is that issuing banks conceal their fees in the warrant's price. There is no way to know the charges and many traders assume there are none.

Another solution is to trade futures and options on the major exchanges in Chicago, New York and London. Commissions are low and the volume is high.

The big question is: 'Can you make money?'

Courses, brokers and exchanges say you can but their livelihood depends on your trading. In fact, you can't win trading options, futures and warrants.

The first problem is that fancy terms like delta, gamma, vega and theta won't help if you don't have the correct 'view' of the future.

Is that hard to achieve? After all, prices move in only two directions: Up and down.

While they claim it is easy, I have asked trainers and other experts: 'Show me.'

Simply predict the price of any stock, index, option, warrant or future's contract for any date in the next 12 months. None has taken up the challenge.

I don't blame them. Markets already include all information in the price. You can outperform the market only if you have special or insider information.

It is hard to come by and may even be illegal if it gives you an unfair trading advantage.

The good news is even without fortune-telling or an expert view of the future, you can still win.

All you need is to buy and hold a diversified portfolio of stocks, bonds and property for the long run.

You can't do that with options, futures and warrants, since they are short-term trading instruments. Nearly all expire in a year or less.

Options, futures and warrants are not assets but promises written into contracts. If you make a short-term bet that the market will go up, an unknown counter-party takes the other side to bet it will go down.

Your win is their loss and vice-versa, making it zero-sum.

When you include the trading costs, it becomes negative sum.

It is like flipping a coin with a friend. You pass money back and forth between each other and the average return is zero.

Suppose a third person - George - enters the room and takes a fee for overseeing the coin flipping. This makes a big difference and the game becomes negative-sum.

You and your friend will eventually lose ALL your money to the middle-man, George. It is only a question of time.

Options, futures and warrants are also zero-sum and become negative-sum when you include commissions. While returns are low - negative, in fact - leverage keeps the risks high.

A better choice is non zero-sum investments like stocks, bonds and property. These appreciate in the long run as the economy grows.

They also have the advantage of paying higher returns for riskier investments. Stocks and property, for example, are more risky and earn higher returns than bonds.

It isn't true for options, futures and warrants where risks are always high while average returns remain negative and produce losses.  Back to Columnists