How Ordinary Investors Can Benefit from a Rigged Stock Market
The stock market is rigged.
As Michael Lewis explained in his instant classic Flash Boys, high-frequency traders (HFT) with co-located T1 cable access to the stock exchanges get stock prices sooner than the average Joe. The world’s central banks are also engaging in stock manipulation with their ultra-low interest rates that force investors to buy overvalued stocks in order to earn any semblance of a decent return in the short term, but such overvalued stocks promise to cause severe financial pain later on when stocks inevitably come back down to earth.
In fact, interest-rate manipulation is so bad that a smart hedge fund manager named David Einhorn recently speculated that value investing is dead:
“What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?”
Since hedge funds try to outperform passive stock indices by both buying undervalued stocks and shorting overvalued stocks, the relentless bid under all stocks has caused many hedge funds to lose big on their short positions and consequently under-perform the long-only S&P 500 for eight consecutive years!
Bottom line: if the small retail investor gets stock prices later than the high-frequency traders, short-term technical trading can’t be successful, and if small retail investors can’t value stocks properly because of interest-rate manipulation, even long-term fundamental investing won’t work.
Is all hope lost for the ordinary investor?
Fortunately, the answer is no, there is still hope for you and me thanks to the use of options. In my Options for Income and Velocity Trader trading services, I actually provide my subscribers with a way to take advantage of market manipulation for their own financial benefit. If you can’t beat ‘em, join ‘em.
The secret involves analyzing how many option contracts are “open” for a particular stock and what side of the trade the professional option dealers are on. The fact is, most option dealers sell options to greedy retail traders, who buy the options wanting to make a big score. Rest assured that when an option dealer writes an options contract (i.e., sells it), he wants that option to expire worthless so that he can keep the money he initially received when he sold it without having any later claim to payment from the hapless option buyer.
The dealer mindset is similar to an insurance company that loves to receive insurance premiums up-front but hates to end up paying out damage claims later. But unlike the insurance company that can’t control acts of God like hurricane damage or a person’s lifespan, option dealers to a large extent can control at what price a stock closes at expiration through well-timed and sizeable stock purchases and sales.
Such stock-price manipulation is illegal, but it is extremely difficult to prove intent. Option dealers can justify why they buy or sell stock with several plausible rationales even if the real reason is stock-price manipulation.
The bottom line is that while in most cases option dealers cannot be stopped from manipulating stock prices, ordinary investors can stop acting as cannon fodder for their manipulative games and start benefiting from this manipulation by analyzing publicly-available option data.
This option data, when properly analyzed, allows us to see at what stock price option dealers would earn the largest profits and, consequently, at what stock price the gullible retail option buyers would lose the most money. Once we determine this “max pain” stock price, subscribers to my Options for Income and Velocity Trader trading services can tailor option trades that benefit from this future “rigged” stock price for big profits.
Watch the video below to see how this max-pain analysis worked perfectly on a trade that I recently recommended to Velocity Trader subscribers: