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Conservative Options Investing: Three tips to surefire success

Posted January 10, 2008

‘Options are only as risky as you allow them to be. Conservative investors have been getting rich from calls and puts for decades. To join their ranks, all you have to do is follow a few simple guidelines. ’ – Andrew Snyder

By Andrew Snyder

Baltimore (TFN) — Investors are scared. The dreaded “R word” has been let loose and is running rampant on Wall Street. The infamous notion of impending doom is spreading to every corner of the market, punching any remaining bulls squarely in the nose. It is creating plenty of room for the bears and their mischievous ways.

The word recession sends a shiver down the spine of most investors that ultimately stops at their wallet. For recent retirees and those about to make the income-reducing plunge, news of an impending recession is enough to drive them to apply for a greeter’s position at the local Wal-Mart.

Bears conquer, you win

These folks don’t realize when the bulls step out of the way, they leave plenty of profit potential in their dust. As long as the market is moving (no matter if it is up or down), there is money to be made. One of the best ways to take advantage of this opportunity is through options investing. When the market is making wild day-to-day swings, options are your key to big money even if you are the most conservative of investors.

This piece is not meant to be an introduction to options, but I will give a brief description to refresh your memory. Options are a unique tool that allows an investor to buy or sell shares of an underlying stock at specified price, no matter what price the representative stock is trading. Unlike equity investments, options have an expiration date, adding to their risk equation.

When the economy is looking bearish, put options (the option to sell an underlying stock at a set price) are often your best bet. In most cases, the further an equity drops, the higher the put option’s price rises. Not only are puts an excellent hedges against a falling market, they are also a great route to superior gains.

My three commandments

Unfortunately, many investors feel options are too risky for their portfolio. It is costing them dearly. Options are only as risky as you allow them to be. Conservative investors have been getting rich from calls and puts for decades. To join their ranks, all you have to do is follow a few simple guidelines.

The first rule for any conservative investor is to plan your moves. Do your homework and create a portfolio plan. When I started in the industry as an advisor, a detailed plan was always priority one.

Look at all your investment routes, choose the best one, and then plan your entry and exit strategies. Create stop losses and determine what price you will sell for a profit. Most importantly, stick with this plan no matter what. Every successful investor has a thorough plan, especially options investors.

The second rule is to stick with in-the-money options. For put options, this means buying options with strike prices above the underlying share’s current selling price. These plays are not known for their triple-digit gains, but they make significant moves and will ensure your portfolio is growing while the economy is contracting.

Finally, no conservative investor should be buying options with short-term expiration dates. I know it is tempting to make a bet with a stock expiring next week, but it is nothing but a gamble. The odds are against you. More often than not (like 99 times out of 100), time decay will destroy the value of your investment.

To make real gains without the risk, pick options with expiration dates well into the future. Three-month, six-month, and twelve-month options are much more conservative and offer just as much profit potential, if not more. Remember, bear markets are often measured in years, not weeks or months.

Options are not just for speculative, risk-taking day traders. Be a conservative options investor and you will be one of the few folks smiling while the bears are savagely destroying Wall Street.


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Posted by Andrew Snyder · Filed Under Investment Strategies 

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