I was researching more complex option strategies today such as straddles, strangles, protective collars, and butterfly spreads. All makes me think of the KISS principle..."KEEP IT SIMPLE STUPID." One thing I did get out of this research is that different option strategies can best be utilized by matching their risk/reward to specific market conditions, the amount of investment, and sector volatility related to share price.
Without getting too far down the rabbit whole, my instinct says that one would be more inclined to hedge more by implementing complex option strategies in volatile markets/larger investments. It is more difficult to keep the ship sailing smoothly with these implied risks, so more complex option "navigation" strategies seem warranted. The difficulty lies in covered calls/puts and writing contracts because upfront investment is greater and one exposes oneself to unlimited losses on the up and down sides if call/put buyers come calling for their shares in adverse/negative return environments.
Ok, enough of that for the moment. I geared down these option trading strategies thinking of the new beginner investor. I stated in a previous post that when starting out in the market, one should think of all stock buys with a "call" mentality. Inherent in this thinking, risks associated with declines in stock price can also be considered "debt expenditure" instead of simply, the defeatist sounding "loss."
"Debt expenditure" in this circumstance can be considered the "risk loss" factor when taking a chance on a long position that may not be at the bottom of the overall market. There is truly NO WAY to predict the bottom of a market. Based on this fact, if one has done their diligence and believes in, let's say the prospects of a small cap company, there is a good chance that the initial investment may drop 30% or more, much like a call or put option does before the stock heads toward positive gains. Anyway, thinking of the decline in a stocks price for a small investment/small cap stock that one strong believes in, it may be better to think of it as the "debt expenditure" or in more basic financial terms, the "cost of goods sold" or "learning curve loss" when getting familiar with a new investment.
In my experience, when I first started investing, I would close out of positions because of short term losses, only to watch a stock go up over the long term. My instincts were correct, I just did not give the buy enough time to turn positive. Once I started viewing stock price losses in terms of "learning curve debt expenditure," I started to become a better investor because I became more disciplined and patient. It make the ride more interesting and often times, more financially rewarding. Give it a try, you might like it!
Without getting too far down the rabbit whole, my instinct says that one would be more inclined to hedge more by implementing complex option strategies in volatile markets/larger investments. It is more difficult to keep the ship sailing smoothly with these implied risks, so more complex option "navigation" strategies seem warranted. The difficulty lies in covered calls/puts and writing contracts because upfront investment is greater and one exposes oneself to unlimited losses on the up and down sides if call/put buyers come calling for their shares in adverse/negative return environments.
Ok, enough of that for the moment. I geared down these option trading strategies thinking of the new beginner investor. I stated in a previous post that when starting out in the market, one should think of all stock buys with a "call" mentality. Inherent in this thinking, risks associated with declines in stock price can also be considered "debt expenditure" instead of simply, the defeatist sounding "loss."
"Debt expenditure" in this circumstance can be considered the "risk loss" factor when taking a chance on a long position that may not be at the bottom of the overall market. There is truly NO WAY to predict the bottom of a market. Based on this fact, if one has done their diligence and believes in, let's say the prospects of a small cap company, there is a good chance that the initial investment may drop 30% or more, much like a call or put option does before the stock heads toward positive gains. Anyway, thinking of the decline in a stocks price for a small investment/small cap stock that one strong believes in, it may be better to think of it as the "debt expenditure" or in more basic financial terms, the "cost of goods sold" or "learning curve loss" when getting familiar with a new investment.
In my experience, when I first started investing, I would close out of positions because of short term losses, only to watch a stock go up over the long term. My instincts were correct, I just did not give the buy enough time to turn positive. Once I started viewing stock price losses in terms of "learning curve debt expenditure," I started to become a better investor because I became more disciplined and patient. It make the ride more interesting and often times, more financially rewarding. Give it a try, you might like it!
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