|  SEP 1996

Neutral Options Strategies by David L. Caplan

Here's an overview of using options as a technique to take advantage of unique situations in the futures markets. By David L. Caplan How can you take advantage of the same principles of success that the most profitable corporations in the world, the casinos and insurance companies, use to improve your odds in trading? Why are insurance companies and casinos so profitable? Insurance companies are consistently profitable because they use the laws of mathematics, probability and special circumstances to their advantage. They can pick and choose who they want to insure and the prices they want to charge for insurance. Therefore, they ""own"" the game by being able to set the rates we need to pay to get on their playing field. Casinos use comparable principles by which to profit. When you gamble on roulette, you appear to be given fair odds on your bet. There are 36 numbers in the roulette wheel and if you pick the right one, you are paid off at 36 to 1. In addition, if you pick even or odd, red or black, you are paid off at the correct odds, 2 to 1. However, what most roulette players fail to consider is that the number ""00"" is also on the roulette wheel and will appear in a game 2.7% of the time. This is the casino's edge, game after game, day after day. Similarly, the odds of other casino games range from 2% to 10%, depending on the type of game or how poorly the players play. While at first glance this percentage might not seem large, it is compounded on a minute-by-minute basis as each game is played, not on a daily or monthly basis the way your savings account is. Professional bookmakers enjoy related mathematical advantages. If a bookie takes bets on a prize fight and balances his book properly, half the bettors will win, and half will lose. The bookie must pay off half these bets. The bookie derives his profit by establishing the odds for the two fighters. Assuming that the fighters are evenly matched, the bookie may quote six to five odds ""pick 'em,"" meaning you can pick either fighter and receive a $5.00 profit for each $6.00 you bet. Therefore, if a bookie is able to obtain bets of $600,000 on each participant in the fight for a total bet of $1.2 million, no matter which fighter wins, he is obligated to pay off $1.1 million, for a profit of $100,000.

by David L. Caplan