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Shelley Souza, Optionetics.com
August 5, 2002

I was thinking about the weight loss industry over the weekend, as I was reading that it is bullish these days. It’s raking in billions of dollars for program owners, but not necessarily providing the same outstanding results in losing pounds for clients. While the market for such programs has grown exponentially each year, as obesity and weight loss become both a national problem and an obsession in America (and elsewhere around the world), the success with individual programs has been unpredictable, to say the least. The weight loss industry is filled with stories of unhappy people who continually experience a “yo-yo” effect, as they try a new diet, lose weight rapidly, but gain it back all their shed pounds (and sometimes more), when the adopted diet becomes unsustainable.

One would think that since the industry is bullish, that is, making money for the producers of diet products, that the products themselves should also have a high success rate. But that doesn’t seem to be the case. (It may also explain the reason that so many companies, which appeared bullish until recently, have collapsed so badly, as their product or service has turned out to be more or less fictitious.) It comes down to the same thing: you can’t have a long-term discrepancy between the promotional image of a product and its actual efficacy, or between actual cash profit and creative numbers in the accounting books.

The only reason the weight loss industry can sustain this anomaly, which usually tends to fail elsewhere, is because the general public’s obsession with weight loss feeds new diet programs, adopting each new fad as it appears in the marketplace.

Fundamentally, however, there is a divergence between the monetary success for the weight loss industry itself and the general failure of the actual diets to remain successful for their clients. A similar model can be seen in risk management failures in derivatives trading where company accounting systems and trading instruments have been manipulated by (usually) so-called “rising stars” who, for a while, have appeared to be creating unprecedented profits, which ultimately turn out to be false.

Joe Jett, a former government securities “rogue” trader at Kidder Peabody is such an example. In the case of Jett, he used a glitch in the Kidder Peabody accounting system that allowed him to strip government bonds and create a phantom profit of $350 million, when it fact there was a loss. Similarly, many weight loss programs claim that their programs are successful because of the high adoption rate. What they rarely reveal, however, is how few adopters succeed in sustaining weight loss over the long-term, making such programs an operating loss for those who should be their beneficiaries, even as they create a profit for their creators and owners.

If we were to create an option trade for the dieters, we’d likely put on a straddle to capture a profit on either side of the yo-yo, making a profit with our put when the pounds “fell away,” and leaving on our call to capture a profit when all the pounds came rebounding back, as our hapless dieter gave up on their diet. The industry itself, though, would be trickier to trade, especially now that the general investing community is sensitive to false promises. Although if we didn’t really care about customer satisfaction, then we’d simply purchase the stock and let it ride the upward trend of the dieting market (and we’d simply shrug away the fact that we were making our profit at the expense of the man or woman in the street). But if we really wanted to get fancy, we’d call in Joe Jett, Nick Leeson, or even George Soros. They’d be able to tell us with a perfectly straight face that at the time of their billion-dollar bets they played by the rules—the question of course is: by whose? (Warning: do not try rogue trading at home, leave it to the experts).

As always, trade carefully.


Shelley Souza
Senior Writer & Trading Strategist
Optionetics.com ~ Your Options Education Site
 

 

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