jeff@mcassoc.com wrote:

hi mark - thanks in advance for your help.

i am taking control of my assets in a proactive way (removing them from the planner i've used) and am inculcating some new "tools" to gain ground quickly, with a strong bias toward options as the key... i am new to options trading (6 months) and have been doing basic calls & puts, and will be doing covered calls in my IRA, but wonder if i'm missing the boat by not investing more time in the complex multi-leg strategies  - so here's my question:

since i do copious amounts of research as a natural habit, am i better off to put the time into researching sectors,
different asset classes, etc., and then betting strongly on basic calls & puts for the bigger bang, or can you build
serious wealth via the more sophisticated financial engineering endemic to multi-leg strategies?

thanks again
jeff  

Hello Jeff, 

Options are versatile investment tools, and your objective is find a method of using them that is effective and profitable for you.  I think it's a good move to handle your investments by yourself.  You spend the necessary time that allwos you to be successful.  This is not for everyone, but sounds correct for you.

1)It's difficult, if not impossible for most people to build wealth when buying options.  Too many things must go right for the option owner (the stock must move in the right direction; the move must occur relatively quickly; and the move must be large enough to overcome the option premium paid). 

2)However, if your research has been fruitful - if you have a good track record (especially in timing your investments), then you may be the rare peprson who can do great things as an option buyer.  I just hate to recommend this strategy to anyone, as I see it as gambling (at least for the vast majority).  

3)If your broker allows it, consider writing cash-secured naked puts, rather than writing covered calls in your IRA.  The methods have the same risk/reward profile when you choose the put with the same strike price and expiration as the call you would have written, but selling the puts is less commission intensive. 

4)I like multi-leg strategies and encourage you to use them. But, I use those methods to further reduce my risk - not as a way to complicate investing.  

a) In other words, Instead of selling naked puts, sell a put spread. Your loss is limited, the profit potential is reduced, but is still substantial, and margin requirements are reduced.  The last benefit brings up the danger of selling too many spreads - just because margin is less.  Avoid that pitfall.

b) When you believe a stock or index is going to trade in a narrow range (or at least not make a big move) you can sell the put spread as above, but you can also sell the out of the money call spread.  Such a 4-legged position is called an iron condor and is widely used in today's investment world. 

c) Spreads work well for option buyers also.  Buy that call spread or put spread instead of the naked put or call.  The downside is that profit potential is greately reduced.  If your stock picks are excellent (proven track record), then this is not for you.  But, risk of loss is substantially reduced and that makes it attractive. 

d) If you are an option buyer, but prefer the added probability of success that comes from selling options, you can accept limited (but substantial) profits buy selling options instead.  Example:  When bullish, you could buy calls or a call spread.  But, consider selling an out of the money (or at the money) put spread instead. If correct in your prediction, you show a good profit.  If mistaken and the stock declines, you still might show a profit when buying calls would have lost money.  The downside is the inability to score a bonanza when selling option premium. 

5) As far as researching sectors (or other classes), nothing changes.  If you believe you have the skill to determine which sectors will out perform (or underperform), then it would be worth your time to make the effort.  But you are looking to build wealth for yourself. You want to invest your money when the probability of winning is on your side.  If you believe you can do this extra research and your track record tells you it's worthwhile, then by all means, go for it.  But, you don't have to find the ultimate or the best possible investment method.  You want a method that works for you.  One that fits your research skills and your temperament.  After all, if selling options is abhorrent to you, then you should avoid it, even if it would increase the odds of having a greater percentage of profitable trades.  You must trade withing your comfort zone - that is important.

6)You appear to be a serious student of the market.  Thus, I believe you will do well.
  

a) But, don't buck the odds. Don't gamble ( a proven track record means buying options may not be a gamble in your case)
b) Choose a method (or methods) that make you comfortable and that have a high probability of success
c) Spend your research time doing things you know you have the skills to do
d) Have patience- after all, you are new to options.  Expand your investments gradually.  You don't have to get rich this year.

    Mark