Today I'm a guest contributor at Jim Wang's very popular and well written personal finance blog, Bargaineering. Jim's work has been cited in the NY Times and Business Week.
The vast majority of passive investors are just that – passive. The idea of combining option strategies with a passive investing approach may seem to be a contradiction in terms, but I believe the idea has merit.
All investors can benefit by owning stock market investments that are protected against large losses. In other words – investments that are insured. Collars are appropriate for passive as well as active investors.
467
…wow tough crowd over there. A waste of your time imo.
Thanks again for the post, I learned a lot reading it and I hope others did as well.
Indeed.
But keep in mind most of the readers of that blog are young, believe deeply in passive investing, and to them, ‘options’ are tools for gamblers.
It’s not an easy crowd to convince. My objective is merely to enlighten – allowing each to decide if options work for them.
But
…nice blog though! Bookmarked…
Yes Dave, he writes a very good blog.
Personal Finance is a topic that should be of interest to many traders. It all relates to money and using it wisely.
Mark
I read your article as well as the extensive comment section. Tough crowd indeed.
The folks who follow that blog certainly seem to be convinced on B&H and passive investing. My investment philosphy was much the same (and still is for 80%+ of my portfolio which is in ETF’s) before I started learning about options – from your books.
Reflecting on my own journey, I think OTM covered calls is a nice transition from B&H passive investing to the world of options. I think you can get about a 1%-2% annualised edge over B&H in the long run with a covered call program, with a little less risk. I since moved on to iron condors mainly because of my realization that I enjoy being market neutral and I am generally ambivalent about market direction (and also I would like to get a 3-4% annualised edge over B&H, which I think is possible with IC’s). I guess my point is I may never have come to trade IC’s if I did not learn about covered calls first.
I am just sharing this with you to give you the perspective of someone who is still about 20 years from retirement. I think covered calls are a good start into options for those who are less concerned about downside risk, and collars are a good intro to options for those who are more concerned aboout downside risk, or have less time to retirement.
Not sure if this perspective is useful to you but I thought I would share it.
Rgds
TR
It is a well-respected personal finance blog. And almost every PF blogger believes in frugality. I do also, but I don’t take is as far as they do.
And when it comes to investing, the approach is to be passive and rely on diversification and asset allocation to see you through hard times in the stock market. I see the value of passive investing and believe the vast majority of investors would be better served if they did not attempt to beat the market.
But using options changes the game. I believe these passive guyss should consider guaranteeing no big losses rather than hope that asset allocation will work as well as it did years ago. Tough job. Most are unconvincable. They are very rigid, but I will continue to try.
Yes, the perspective is useful and I am glad you shared it. But I go just a bit further. You don’t have to be concerned about downside risk. Buy insurance anyway – for at least a portion of the portfolio.
Maybe pointing out that Warren Buffett uses options might make them appear less like gambling
Greg,
True.
On the other hand, he does call them as ‘tools of mass destruction,’ but is not referring to the options we trade.