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