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From: kjp@cornell.UUCP (Kenneth J. Perry)
Newsgroups: net.invest
Subject: Re: Free newsletter
Message-ID: <6839@cornell.UUCP>
Date: Fri, 9-Mar-84 09:38:23 EST
Article-I.D.: cornell.6839
Posted: Fri Mar  9 09:38:23 1984
Date-Received: Sat, 10-Mar-84 11:08:55 EST
References: <667@nsc.UUCP> I've been keeping track of my selections of some volatile and risky, <1122@sunybcs.UURe: Free newsletter
Organization: Cornell Univ. CS Dept.
Lines: 33

With regard to Howard Trachtman's "riskless" arbitrage opportunity
(the one in his "newsletter" which claims a "guaranteed profit"):
it just is not so.

Trachtman asserts that, regardless of the price of IBM's stock on 
July 20, the portfolio of options he assembles guarantees a profit
of at least two hundred dollars.  This profit is assured ONLY IF
IBM is selling for less than 110.  For example, suppose IBM stock is
selling for 130 per share on July 20.  Then the put option Trachtman
specifies (IBM 120 put) has no intrinsic value.  Furthermore the
spread between the two call options he specifies (long position in 
one IBM July 100 call; short in one IBM July 110 call) is worth only
10 points (that is, 1000 dollars).  So on July 20, the portfolio 
which was bought for 1800 dollars is worth only 1000 dollars for a
net loss of 800 dollars.  Not exactly a "guaranteed" profit.

In general, one should be wary of claims that "guarantee" a return
on investment which exceeds the "riskless rate" (that is, the rate
of return obtainable by an investor adverse to all risk of loss.
The interest rate on Treasury bills or government-insured bank accounts are
good approximations of the "riskless" rate).  It is a fundamental tenet
of finance theory that no riskless arbitrage opportunities exist whose
return exceeds the riskless rate.  Assuming efficient markets, if such
a portfolio was shown to exist then everyone would buy it and the riskless
rate would become the return obtained on that portfolio.  

The moral of the story is this: if an investment looks too good to be
true, it probably is.  Whenever you obtain a rate of return higher than
the riskless rate, your investment must entail some risk.  Some of us
are willing to bear some risk in order to get a better return but one
should never claim that none is involved.