Fraud: Wrongful or criminal deception intended to result in financial or personal gain(source: Google search)
The Banks also play the game
The old profession of market making may be dead, according to All Options’ spokesman, but with a little creativity it’s fairly easy for banks to invent something new. Let’s have a small look what Royal Bank of Scotland is bringing us for fancy structured products.
The rocket scientists at RBS have invented a basic option construction (“short atm put”) and labelled it with a fancy name (“discounter”). As of October 4th, they are actually selling this structured product to the retail investors. The marketing department didn’t only create the name Discounter, but also the wonderful slogan (“buy shares against a discounted price”). The product isn’t just comparable with a short put position, it is exactly the same thing. When the underlying share price goes up, you pocket the short put premium. If the prices drop, you’ll end up with buying the shares (and still get the option premium of course). You could also call it covered call writing.
First of all, the retail investors are fooled into buying repackaged crap – there’s an adequate Dutch saying for that (selling turnips as lemons). Apart from trying to sell retail investors ordinary short puts, this RBS product is daylight robbery. They are charging an outrageous 2 percent fee per year, for basically nothing. Retail investors hand over their hard earned cash into the greedy hands of RBS, and RBS is charging them for it. Selling a bond to the bank and having to pay for it. If RBS goes bankrupt, you’ll lose a part of your investment. Nothing wrong with structured products, you always end up overpaying but as long as it’s tricky or impossible to do-it-yourself it’s fine with me. This one, however, is a bridge too far.
We’ve recently had a lot of attention for financial institutions cheating on their customers, but they haven’t learned their lesson and prove unreliable. Cheating clients and getting away with it, at least for the time being. Investors should just buy the shares, and sell the at-the-money call if they wish to replicate this product. Stay away from the “discount” swindle.
Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.