38 lines
3.0 KiB
Plaintext
38 lines
3.0 KiB
Plaintext
Chapter 42: The Best Strategy? 935
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period. ( Of course, one would hope that he uses only 15 to 20% of his assets for spec
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ulative option buying.)
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Many investors fit somewhere in between the conservative description and the
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aggressive description. They might want to have the opportunity to make large prof
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its, but certainly are not willing to risk a large percentage of their available funds in
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a short period of time. Spreads might therefore appeal to this type of investor, espe
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cially the low-debit bullish or bearish calendar spreads. He might also consider occa
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sional ventures into other types of strategies-bullish or bearish spreads, straddle
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buys or writes, and so on-but would generally not be into a wide range of these
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types of positions. The T-bill/option strategy might work well for this investor also.
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The wealthy aggressive investor may be attracted by strategies that offer the
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opportunity to make money from credit positions, such as straddle or combination
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writing. Although ratio writing is not a credit strategy, it might also appeal to this type
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of investor because of the large amounts of time value premium that are gathered in.
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These are generally strategies for the wealthier investor because he needs the "stay
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ing power" to be able to ride out adverse cycles. If he can do this, he should be able
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to operate the strategy for a sufficient period of time in order to profit from the con
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stant selling of time value premiums.
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In essence, the answer to the question of "which strategy is best" again revolves
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around that familiar word, "suitability." The financial needs and investment objectives
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of the individual investor are more important than the merits of the strategy itself. It
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sounds nice to say that he would like to participate in strategies with limited risk and
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potentially large profits. Unfortunately, if the actual mechanics of the strategy involve
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risk that is not suitable for the investor, he should not use the strategy, no matter how
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attractive it sounds.
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Example: The T-bill/option strategy seems attractive: limited risk because only 10%
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of one's assets are subjected to risk annually; the remaining 90% of one's assets earn
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interest; and if the option profits materialize, they could be large. What if the worst
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scenario unfolds? Suppose that poor option selections are continuously made and
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there are three or four years of losses, coupled with a declining rate of interest earned
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from the Treasury bills (not to mention the commission charges for trading the secu
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rities). The portfolio might have lost 15 or 20% of its assets over those years. A good
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test of suitability is for the investor to ask himself, in advance: "How will I react if the
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worst case occurs?" If there will be sleepless nights, pointing of fingers, threats, and
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so forth, the strategy is unsuitable. If, on the other hand, the investor believes that he
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would be disappointed (because no one likes to lose money), but that he can with
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stand the risk, the strategy may indeed be suitable. |