36 lines
2.8 KiB
Plaintext
36 lines
2.8 KiB
Plaintext
416 Part IV: Additional Considerations
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option investment down from the current $30,000 figure to $12,000, or 10% of his
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total assets. If one fails to adhere to this readjustment of his funds after profits are
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made, he may eventually lose those profits. Since options can lose a great percentage
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of their worth in a short time pe1iod, the investor is always running the risk that the
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option portion of his investment may be nearly wiped out. If he has kept all his prof
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its in the option portion of his strategy, he is constantly risking nearly all of his accu
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mulated profits, and that is not wise.
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One must also adjust his ratio of T-bills to options after losses occur.
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Example: In the first year, the strategist loses all of the $10,000 he originally placed
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in options. This would leave him with total assets of $90,000 plus interest (possibly
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$6,000 of interest might be earned). He could readjust to a 90:10 ratio by selling out
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some of the T-bills and using the proceeds to buy options. If one follows this strate
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gy, he will be risking 10% of his funds each year. Thus, a series of loss years could
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depreciate the initial assets, although the net losses in one year would be smaller than
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10% because of the interest earned on the T-bills. It is recommended that the strate
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gist pursue this method of readjusting his ratios in both up and down markets in
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order to constantly provide himself with essentially similar risk/reward opportunities
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at all times.
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The individual can blend the option selection process and the adjustment of the
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T-bill/option ratio to fit his individual portfolio. The larger portfolio can be diversi
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fied into options \vith differing holding periods, and the ratio adjustments can be
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made quite frequently, perhaps once a month. The smaller investor should concen
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trate on somewhat longer holding periods for his options, and would adjust the ratio
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less often. Some examples might help to illustrate the way in which both the large
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and small strategist might operate. It should be noted that this T-bill/option strategy
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is quite adaptable to fairly small sums of money, as long as the 10% that is going to
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be put into option purchases allows one to be able to participate in a reasonable man
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ner. A tactic for the extremely small investor is also described below.
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ANNUALIZED RISK
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Before getting into portfolio size, let us describe the concept of annualized risk.
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One might want to purchase options with the intent of holding some of them for 30
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days, some for 90 days, and some for 180 days. Recall that he does not want his
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option purchases to represent more than 10% annual risk at any time. In actual
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practice, if one purchases an option that has 90 days of life, but he is planning to
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hold the option only 30 days, he will most likely not lose 100% of his investment in |