I've tried to get the mainstream media interested in writing about options and how individual investors can benefit by using them to hedge (reduce the risk of owning) a stock market portfolio.
No deal. The usual, and reasonable, response is that options are too difficult to understand and that their readers may get the wrong impression about options, and use them as gambling tools.
But perhaps the tide is turning. Harriet Johnson Brackey is the personal finance writer for the South Florida Sun-Sentinel, and in a recent blog passed on the recommendation of a real estate broker who proposed that homeowners increase they chances of making a sale during these difficult times. The idea is to sell a covered call option on a house.
Here's the blog post in full (underlining is mine):
I just got a job in another city. I need to sell my house — quickly. What can I do?
In this depressed housing market, with so many homes for sale, you have to be creative. Real estate agent David Dweck with Re/Max Professionals in Coconut Creek [FL] suggests listing it rent-to-own.
The concept is an old one, in which buyers work their way into home ownership. The way he structures the deal: You set a price to sell your house at some point in the future. The renter pays you a non-refundable, upfront sum for the right to buy it at that price.
The renter moves in, and handles all the maintenance of the home just like an owner would. At the end of the contract, the renter either goes through with the purchase or walks away.
"People who rent-to-own maybe had a foreclosure, and they're rebuilding their credit," he said. "They can kick the tires before they buy it."
There it is. The renter buys a call option. The cost (option premium) and strike price (the set purchase price) are established upfront. At the end of the trial period, the renter must exercise the option (buy the house) or walk away (allow it to expire worthless).
The real estate agent understands the benefits of writing covered calls, and a well-respected financial journalist encourages the idea.
The covered call provides a cash premium to the owner, as a partial hedge in case the price of his home declines. The potential buyer gains time to make a final decision – one that is going to be based on whether real estate prices move higher or lower. If the current trend continues, there's little chance the renter will exercise the option, but if home prices bottom out and move higher, the renter will have a bargain.
That bring up the following question from my perspective: How can I encourage other financial journalists to write about using covered call writing on an individual stock, and not only on a house?
It's not that covered call writing is the ideal strategy. It isn't. But, it's a great entry point for investors who want to gain the benefits of learning to use options as a tool for reducing stock market risk. The markets have been volatile and one way to reduce exposure to that volatility is to use options as a hedge.