Options and Risk Reduction

A note from a Gold Member at Options for Rookies Premium reminds us that investing is serious business.

I am a beginner.

We lost a ton in 2008 (as did many others) and now we are paying college tuition for one of my children and will be paying soon for a second. Also both may be interested in grad school and I hate the idea of their needing to borrow a lot and be deep in debt.

We had saved up enough for college, and actually lost a big fraction of it in 2008. Very frustrating as you can imagine, and thus my interest in options and risk reduction.

J

I’m very sorry to hear of your situation. Knowing that you are not alone is not much of a consolation.

In my school days, or at least in chemistry, no one paid for grad school. We all had assistantships or fellowships. I suppose times have changed. This is none of my business, but some advisors would tell you NOT to sacrifice your financial security, but to have your kids pay their own way – at least after college. However, I admire that you want to prevent them from incurring the large debt and are willing to assume that burden yourselves. It is a big burden.

I understand where you are. I believe one warning is in order:

When ‘investing’ or ‘trading’ and you NEED the money – it is far too easy to press and take extra risk. That does not lead to good results. So keep that point in mind when making trade decisions.

The fact that you will be using options is not going to solve your problems all by itself. However, with reduced risk as your objective, you can still earn good money with that reduced risk. I’m here to help you achieve that result.

In moving forward, there’s an important point you may not have considered. You spent your entire investing career being bullish and looking for stocks that are moving higher. That is unnecessary with options. You can take short positions and bet on the downside. You can adopt market-neutral trades and not care where the market moves, so long as it doesn’t move very far. Or you can take a different tack and wager that the big move will occur. You do that by owning puts and calls. But that is a long shot and I do not recommend it. The point is: Being bullish is not necessary.

MINDSET changes required

Rising markets are not your only friend.
Investment portfolios can be insured.
There is no need to put everything into owning stocks.
Many strategies come with limited risk. I urge that you consider only those.

A an options beginner, you have some exciting times ahead. But you are tackling a serious problem and I know that both of you are not in it the for the excitement. I wish you the best, and if you have questions, please feel free to ask.

987

4 Responses to Options and Risk Reduction

  1. D. Hom 06/14/2011 at 11:24 AM #

    “In my school days, or at least in chemistry, no one paid for grad school. We all had assistantships or fellowships. I suppose times have changed.”

    They haven’t. If a graduate degree is in a high-demand field, there is usually an assistantship to pay for it. If it isn’t in a high-demand field, what benefit is there to obtaining the degree that could not be obtained in the public library? There’s a diploma and connections, but is that worth the money and forfeited income?

    “Some advisors would tell you NOT to sacrifice your financial security, but to have your kids pay their own way – at least after college.”

    I agree. Investing and saving go hand-in-hand. The principal for investing has to come from somewhere.

    • Mark D Wolfinger 06/14/2011 at 11:57 AM #

      DH,
      It’s very difficult to suggest to people that they not baby their children. When you have to work for something, it’s appreciated all the more. But making life difficult for yourself by spending investment capital on schooling – so junior can go to grad school – that’s just not a smart idea. By paying for college, these fine parents have more than fulfilled their obligations.

      Appreciate the insight on grad school.

  2. Alexey 06/15/2011 at 12:10 AM #

    I’m wondering why did he invest the tuition money in the stocks rather than using a government program specifically tailored for it (in our state it’s called GET)? Personally I will never invest money which I’m going to use to pay for tuition for my kids in the stocks, that’s just too risky for me.

    • Mark D Wolfinger 06/15/2011 at 8:24 AM #

      Alexey,

      It’s not easy for someone who has been earning good income to change course.

      Sure, we all know that the stock market is never the place for money that is needed within the next few years. We all know that – but pulling the trigger is much more difficult. The sad part is that they did not head for the exits earlier – when the account value was approaching their ‘I cannot afford to lose any more’ level.

      Thanks for sharing.