Options and Your Financial Independence

When adopting conservative
options strategies (my favorites are listed below), you have an excellent
opportunity to accumulate wealth over an extended period of time – due to the
ability to compound earnings. “Compound
interest is the eighth wonder of the world” is a quotation (often attributed to
Albert Einstein, but I’ve seen no proof) that describes something unknown to
most youngsters. In my opinion, this
idea ought to be a mandatory part of every high school and college curriculum.

If at all possible, you must
consider saving money at early as possible to reach that goal of financial independence.  You may want money for retirement or other long-term savings goals, such
as paying for college for your children – even if they are not yet born!  The longer you wait to get started
(even five years makes a huge difference), the less benefit you gain from the
power of compounding.

In the US, a Roth IRA
provides the best savings program because all profits accumulate tax free, assuming you make no withdrawals before age 59 1/2.

A traditional IRA allows you to invest prior
to paying taxes, and saves cash now. But, taxes must be paid on withdrawal – the more you earn, the higher your taxes.  Opt for the Roth IRA if possible.

Regardless of how you save,
if you have the ability to manage your own account (sadly not possible with
most of today’s 401k plans), then adopting one, or more, of my favorite option strategies increases your chances of earning profits year after year. And reinvesting those profits allows you to see the magic of compounding for yourself.

 

The strategies

Covered
call writing
and cash-secured naked
put selling
are equivalent
methods. They are the most risky of the
methods outlined here, but represent an improvement over the traditional buy
and hold methodology.

Collars
and put
credit spreads
are equivalent
positions that provide extra insurance against loss – when compared with the
first two methods. The bearish investor
can opt for call credit spreads.

Iron
condors and double diagonals involve both call and put credit spreads and
are ideal for investors who want to be market-neutral (neither bullish nor
bearish).

 

Not all brokers allow their
customers to adopt all strategies in retirement accounts, but you should be able
to find one who allows you to use your favorite method(s).

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One Response to Options and Your Financial Independence

  1. John 08/04/2008 at 2:41 PM #

    Mark, i have written a covered call. At this point it is in the money. When the expiration date arrives if the stock has not been called away is there anything i need to do to close the position? Or will it expires worthless if it is not exercised? Thanks John
    John,
    If it not exercised, it expires worthless. there is nothing more for you to do.
    If you have access your brokerage account over expiration weekend, you will notice that the option is still in your account.
    If it’s there Saturday morning, DO NOT assume that it has not been exercised It will not officially disappear earlier than Sunday or Monday morning.
    The reason is because Saturday is the true expiration date and expiring positions are not removed from your account until after Saturday.
    Mark