Tag Archives | trading options risk management are options worthwhile passive investing active investing beat the market

Q & A. Trading options: Is it worth the effort?

Mark,

I wonder how many others have similar thoughts. 

As I've spent the many years trying to pick the stocks (I'm part of the 70% 'they' say who don't even beat the market), I settled on the indexes because if I have N stocks I'm
considering, chances are, and I've proven it, that I'll pick the one(s)
that under-perform slightly to significantly.  Or, as has happened
often, I picked a good one, but it hit a protective stop,
which became the near-term low. 

By doing indexes, the risk is spread and odds are better to
gain (theoretically).  You have to have such a watchful eye on what's
happening, anyway, and you can only make it green if you happen to be
on the right side of the trend.

Don,

You have concluded that passive investing beats active investing, a conclusion reached by many.  Professional advisors and planners, along with financial bloggers are pretty much in agreement that the vast majority of investors cannot beat the market by picking stocks.

Short-term traders, especially system traders disagree and feel they do beat the market.  But they are not investors.

Not everyone sees that he/she cannot out-perform the averages and many will never cease trying.  Be thankful you reached this first stage.


So far, in my elementary learning of options, it seems that you have to be on the right side of the trend to consistently
make money.  On a simple example, buy stock,
immediately write a covered call and buy a put.  If you do it right
away, chances are your return is near zero due to costs.  But, if you
buy the stock and it goes up, using the collar gives you a locked in
protection.  But, if you're locking it in, why not just sell the stock
in the first place and avoid the hassle?

When opening a collar position, you allow for a small loss and some profit potential.  You do not 'lock it in.'  Yes, you must be on the right side to profit.  Collars are insurance to limit losses.  But you don't profit when the stock or index falls and you own a collar position.

To profit from a market decline, you must be short, not long.

In a fantasy world, you'd easily be able to find situations that allow you to apply a strategy, knowing you have a locked in
6%/month, say, and not have to spend so much time on research, stealing
it from family and life in general.  Sure, everything takes work, and
maybe there's not an easier way, but by trying to learn more about
options strategies (which inherently offer protection and reduce risk),
will that knowledge/understanding of them prove useful or just a
further stealer of our limited time with no real added benefit?  If
there's no real added benefit, then it continues to become fulfilling
of Nicolas Darvas' book title: "Wall Street: The Other Las Vegas" and
you're lucky if your capital appreciates.

OK Don, now we're into the big stuff.

1) 6% per month is more than fantasyland. In the real world that is a 100% annualized return.

Fantasyland

2) Options don't provide 'a benefit' just because you use options as an investment tool.  Options do one thing very well – and that's to allow you to measure and control the risk of any investment. 

'Options' don't make money.  The option strategy you choose doesn't make money for you.

You earn money by doing a good job of risk management.  The Greeks allow the quantification of risk. Once you understand how much risk there is in your position, you can modify it (or not).  If you control risk well, you will never take a big loss and you should prosper as time passes.

The strategy is merely choosing the specific options to buy and sell.  We all have strategies that suit us because they fit right into our comfort zones.  But, it's not the strategy per se that makes money.  It' how well you manage the position.

Thus, if you do no work and expect that merely using options will save the day, then yes, it will be a time stealer.  If you are diligent, truly understand what you are trading and what must happen for you to achieve a profit from a trade, and understand what can go wrong (and how much you can lose) – then – and only then will using options prove to be a benefit. 

Or you can ignore all that and just hope to be lucky. That seems foolish, doesn't it?

 

Regards,

Don

461
Read full story ยท Comments are closed