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Options trading: Questions welcome

I received the following message via e-mail and reproduced an abbreviated version here:

Hi Mark,

In your part 2 article of "Can You Beat the Market?", you stated the
exact reason I started learning about options recently: "…I'm looking
for an investment strategy that increases my earnings at the same time
that it reduces risk".  I'm not shying away from them, but want to
learn, as by my initial learnings they can help reduce the risk and
generate extra income/reduce cost basis. 

Over the years, I've started
dealing more w/ ETFs because of my frustration of owning stocks that
tanked or whipsawed through stop losses and then took off right afterward. 
The ETFs are generally less volatile and since it's hard enough to pick
the individual stocks that will outperform, I've settled on these for
significantly lower risk on a downside gap vs stocks (stocks can gap
20-50% or so, but not the SPY or QQQQ).  I'm looking forward to your next articles as, yes, covered calls
generates income and lowers the stock cost basis.  Those alone don't
offer the downside protection that puts would provide…  I don't know if there's a way
to combine all these or how to time the strategies, but that's what I'm
trying to learn

I've been reading "Sure Thing Options Trading" by Angell to learn some
basics.  If you have any common-sense advice from here, I'd appreciate
your tutelage.  Should I just watch for more articles by you on this
topic?

 
As I have further questions going forward, do you mind answering them? 
I wouldn't overdo the privilege.

 
Regards,

Don

***

Hello Don,

1) I am unfamiliar with Angell's book. Take a look at a sampler version of my recent book by clicking here.

2) Yes, options were designed to reduce risk.  When used that way, most of the time the probability of earning a profit is increased – but those profits are limited.

3) Using ETFs or indexes is an excellent method for diversifying your stock holdings.  As you state, one of the benefits is the extreme unlikelihood of a large gap opening.  Such a gap is not impossible, but it's far less likely to occur than with individual stocks.  That's one good method for reducing risk.

4) I always say there is no 'best' strategy, but for what you are looking to do: protect assets from losses, increase profitability, and find a way to combine the good parts of various option techniques, I believe the collar fits the bill.

I've discussed the collar several times in the past, and will no doubt do so again.  Click here for a detailed example of a collar trade.

5) When I continue the series on 'beating the market: searching for answers,' the collar is the next strategy to be discussed.  One of the complaints that most people have about the collar is that it's costly – and using that strategy makes it almost impossible to beat the market. 

I'll take an up-to-the-minute look at collars and how difficult it is to make money using them.

6) Don – please send questions (and suggested topics for a blog post) and I'll do my best to provide a good answer.  It's not a problem.  That same request goes out to all readers of this blog.  If you have a question that's just too personal to post, send it by e-mail.

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