Back in 1998, the head of the derivatives desk at Goldman made me read a 1,000 page book called, Options As A Strategic Investment by Lawrence McMillan after our first round of interviews. When I came back for my next round of interviews two months later, all they asked was,”What is a butterfly spread?” from the second chapter! I got the answer right, but was annoyed that I had spent so much time on a book I’d never use again. Ever since then, I haven’t spent any time trading options myself. Instead, I just buy the occassional structured note for a fee to keep things simple for downside protection. But for those of you who are super gung-ho about investing, here is a guest post from Dom at GenYFinanceGuy.com about the benefits of selling options.
I have always believed that risk is a function of education. The media may have you convinced that options are very risky, but what if I told you that you could actually take on less risk than buying stock outright? If you take careful steps and don’t speculate, you can increase your probability and reduce your cost basis. Oh, and you won’t be afraid of volatility again, you will actually hope and pray for it.
There are two option strategies that will allow you to buy Stocks and ETF’s below current market prices. The Covered Call and the Short Put are option strategies that allow you to go long at discounted prices every trading day of the year. The discount prices get deeper during corrections when fear drives volatility through the roof, which inflates option premiums.
Before we get into how options can be safer and more advantageous than buying stock outright, let’s get a few definitions out of the way.