Did Felix Salmon really just write this in defense of his reverse convertibles stance??
For one thing, stocks generally go up over time: they’re a positive-sum game.
Retail investors, as a rule, have no business buying instruments with limited upside but 100% downside — I’d even include individual bonds in that, despite the fact that they, like stocks, are a positive-sum game.
I am Jack's stunned silence.
Felix's post is an excellent overview of why reverse convertibles are a terrible investment. However it gives no backing to the argument they should be banned rather than avoided. In particular, I don't follow this logic:
The problem with reverse converts isn’t that they’re too risky, it’s that they’re a transfer of wealth from the client to the broker. This is true in general whenever a stockbroker puts a client into an options trade: options, being derivatives, are a zero-sum game, and the options game is very profitable for the sell side. It’s simply a truism, then, to say that the buy side, in aggregate, loses money whenever it dips into the options market.
Why is it a problem if the transfer of wealth is from client to broker? Since when do people care (or, indeed, even know) whom they face on a trade? Moreover, options are more profitable for brokers simply because they are less liquid; they charge higher commissions, not because of any inherent security characteristic. Indeed, commissions are likely what the last "truism" is premised on, but that seems a stretch to me - like saying on aggregate, baseball fans lose because they buy tickets to watch their team play.