34 lines
2.3 KiB
Plaintext
34 lines
2.3 KiB
Plaintext
occurred in the Reagan Crash of 1987; the money puts bought at $0.625 on
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October 16 were worth hundreds of dollars on October 19—if you could get
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the broker to pick up the telephone and trade them. (The editor had a client
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at Options Research, Inc. during that time who lost $57 million in three
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days and almost brought down a major Chicago bank; he had sold too many
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naked puts.)
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The most sophisticated and skilled traders in the world make their livings
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(quite sumptuous livings, thank you) trading options. Educated estimates
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have been made that as many as 90% of retail options traders lose money.
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That combined with the fact that by far it is the general public that buys
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(rather than sells) options should suggest some syllogistic reasoning to the
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reader.
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With these facts firmly fixed in mind, let us put options in their proper
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perspective for the general investor. Options have a number of useful
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functions, such as offering the trader powerful leverage. With an option, he
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can control much more stock than by the direct purchase of stock—his
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capital stretches much further. So options are an ideal speculative
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instrument (Exaggerated leverage is almost always a characteristic of
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speculative instruments.), but they can also be used in a most conservative
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way—as an insurance policy. For example, a position on the long security
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side may be hedged by the purchase of a put on the option side. (This is not
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a specific recommendation to do this. Every specific situation should be
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evaluated by the prudent investor with professional assistance as to its
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monetary consequences.)
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The experienced investor may also use options to increase yield on his
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portfolio of securities. He may write covered calls or naked puts on a stock
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to acquire it at a lower cost (e.g., he sells out of the money put options. This
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is a way of being long the stock; if the stock comes back to the exercise
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price, he acquires the stock. If not, he pockets the premium.)
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There are numerous tactics of this sort that may be played with options.
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Played because, for the general investor, the options game can be
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disastrous, as professionals are not playing. They are seriously practicing
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skills the amateur can never hope to master. Many floor traders, indeed,
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would qualify as idiot savants—they can compute the “fair value” of |