Fullerton'sStrategic Option Investing
investing with options: history
When first managing hedging programs as an executive nearly 20 years ago, derivatives were a tool to manage business performance, reducing the volatility of financial results. As the CFO, I needed visibility into future performance to manage taxes, cash flow, equity, and bank facilities. An erratic cost of goods due to fluctuating commodity prices would put the company at the mercy of the market. With derivatives, our component costs could be fixed to a small range, allowing business results to parallel business plan execution. The derivatives market put the company in control of its own destiny.
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investing with options: Now
Fast-forward in time to the present, and the past 5 years have seen derivative securities tailored to both institutional and retail investors as brokerage firms and exchanges have reduced transaction costs and notional sizes. Skyrocketing volumes and open interest along with new technology in trading platforms and digital commerce have opened the door of derivatives to the retail investor.
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investing with options: The gap
Trading tools, websites, podcasts, digital applications, mobile trading platforms, and educational lessons have exploded on the internet. Experts teach numerous option strategies to capture value from the derivatives market, focused on trading within a 45-day time frame at most, a 25-day time frame as optimal, or even weekly options strategies for those more risk tolerant. While many of these trading strategies do have legitimate value and an expectation for above market returns, this whole industry is focused on trading. Personally, I don’t want to watch the market daily or even weekly.
While knowledgeable option trading may provide advantaged returns, relatively little information is available to focus on the use of derivative securities (options) for investing. Options have a potential role for risk management or mitigation, improved risk/reward profile, and improved return potential.
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investing with options:
On this site, you will note a significant difference between the terms option trading and option investing. Trading will refer to transactions of relatively short time frames, generally less than 60 days in time to expiry. Investing, alternatively, refers to transactions undertaken for a minimum of 90 days, but generally extending beyond a year in time.
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Enable Strategic Repository
Provide members with a repository for Equity Option Strategies, applicable for both traders and investors. Enable a community to learn, develop, question, execute, and communicate both short-term and long-term strategies for increased financial returns. This repository will provide links to many well-documented strategies available on various websites. We will also document strategies on this site built from the ground up, in expectation of providing a valuable resource to members.
In this endeavor, a few generally accepted option strategies will not be highlighted as they do not fit into the philosophy of providing value to members. Strategies requiring naked call positions, uncovered short stock positions, and back spreads provide easy examples. Long calls and long puts will be included only for educational purposes, as the purchase of long option premium is a losing endeavor over time.
Certain strategies simply have too much outlier risk for inclusion based on personal risk tolerances … the recent GME debacle is the most dramatic and famous example of such risk.
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Applying Options to Investing Strategies
Options can improve financial returns, reduce risk, and hedge long-term investment positions. While most trading strategies focus on transactions of 21-60 days, long-term investors can successfully employ equity option transactions for terms from 2-50 years.
Investing with Options
While knowledgeable short-term option trading may provide positive financial returns, relatively little information has been presented to retail investors that focus on using options for long-term investing. When utilized correctly, options may be employed by the retail investor to:
- Manage or mitigate risk
- Improve financial returns
- Reduce capital requirements
Strategic Option Investing Process
We believe in a staged investment approach to building wealth.
From foundational savings to incremental returns through options, anyone can accumulate wealth with financial knowledge and a disciplined commitment to an investment plan.