About a year ago, the HBO show Real Sports, profiled former major leaguer Lenny ‘Nails’ Dykstra. The less-than-eloquent, foul-mouthed, tobacco-chewing Dykstra was portrayed as a business genius in a piece that featured CNBC’s Jim Cramer extolling Dykstra’s market acumen and showed Dykstra trying to explain his options trading strategy to a confused Bernard Goldberg who reported the piece. Last month, the same show told how Dykstra’s fortunes have changed dramatically for the worst; living alone in an $18 million dollar unfurnished mansion, being sued by former business partners, former employees, and several creditors. On Thursday, Dykstra filed for Chapter 11 bankruptcy protection, claiming assets of $50,000 and liabilities of $10 to $50 million. In rambling defenses of his position on both HBO and CNBC, Dykstra blamed his woes on the failure of a new magazine he was developing for high-rollers called The Players Club (isn’t that Telly Savalas’s gig), and “bank fraud”. We think something else was involved.
Dykstra’s option trading strategy, which he elaborated on in his columns in TheStreet.com,involved buying deep in-the-money calls. On the surface it was a seemingly brilliant way to purchase a lot of shares in strong stocks for less money than actually purchasing the stocks. The problem with this strategy, or any “Magic Bullet” strategy, that teaches one way to approach the market is that markets change. We did some research and found that Dykstra and his strategy had his share of critics even before his fall from grace.The CXO Advisory Group in their “Guru Grades” found in April of 2008, that Dykstra performed no better than the market as a whole “suggesting no stock picking ability”. Furthermore in an options trading blog from January of 2007 we found these prescient comments from someone called “SmilingSynic“:
“He buys LEAPS(1.) on stocks, and buys more if they go down, and sells as soon he gets a dollar of profit. In this bull market, he looks great, but in a bear market, he and his readers will get killed…..Lenny simply uses ditm (deep-in-the-money) LEAPS calls in lieu of the underlying. Not bad in itself….But he really does not know options, and his Martingale Strategy (2). is a disaster waiting to happen”
We believe that disaster did happen. Between the two Real Sports pieces, the Dow Jones lost over 50% of its value and is still only about 58% of its previous high, and “Nails” is in Chapter 11. We don’t believe that is a coincidence. Dykstra says his trading had nothing to do with his current problems, and that he is “111-0″ in picking market winners. Come on Lenny, even Bernie Madoff said he had two losing months. The truth is that Lenny Dykstra was a multi-dimensional ballplayer with a one-dimensional approach to trading.
Why do we tell you our spin on Lenny’s tale of woe? Because at The Chicago School of Trading we believe there is no one strategy that works all the time for every trader – no “Magic Bullets”! We teach all of our students that a professional options trader needs to know many strategies and when to use them. What seems fine in a bull market is death in a bear market. What works with low volatility will be a disaster with high volatility. What is easy in a liquid stock is difficult with a small cap stock, etc. If you want to trade options, become a well-rounded, professional trader that knows how to trade and prosper in all market conditions. We can teach you how to be that kind of trader and we won’t be spitting tobacco juice as we do it.
1.- Long-term Equity AnticiPation Securities
2.- an 18th Century betting system that was believed to eventually deliver a sure winner – it did not