Chapter 26: Buying Options and Treasury Bills 421 
There are trade-offs involved as well. If, after purchasing the options, the mar­
ket experiences a substantial rally, that portion of the option purchase money that is 
devoted to put option purchases will be lost. Thus, the combination of both put and 
call purchases would do better in a down market than a strategy of buying only calls, 
but would do worse in an up market. In a broad sense, it makes sense to include some 
put purchases if one has the funds to diversify, since the frequency of market rallies 
is smaller than the combined frequency of market rallies and declines. The investor 
who owns both puts and calls will be able to profit from substantial moves in either 
direction, because the profitable options will be able to overcome the limited losses 
on the unprofitable ones. 
SUMMARY 
In summary, the T-bill/option strategy is attractive from several viewpoints. Its true 
advantage lies in the fact that it has predefined risk and does not have a limit on 
potential profits. Some theorists claim it is the best strategy available, if the options 
are "underpriced" when they are purchased. The strategy is also relatively simple to 
operate. It is not necessary to have a margin account or to compute collateral require­
ments for uncovered options; the strategy can be operated completely from a cash 
account. There are no spreads involved, nor is it necessary to worry about details such 
as early assignment (because there are no short options in this strategy). 
The investor who is going to employ this strategy, however, must not be delud­
ed into thinking that it is so simple that it does not take any work at all. The concepts 
and application of annualized risk management are very important to the strategy. So 
are the mechanics of option buying - particularly a disciplined, rational approach to 
the selection of which calls and/or puts to buy. Consequently, this strategy is suitable 
only for the investor who has both the time and the discipline to operate it correctly.