Conservative Options Trading: Hedging Strategies, Cash Cows, and Loss Recovery

Conservative Options Trading examines the many ways this can be accomplished, based on options for three highly-rated companies. These are qualified as a first step by exceptionally attractive fundamental attributes and trends: Higher than average dividend yield with dividend increases over at least 10 years; a range of moderate price/earnings ratios each year; growing revenue, earnings and net return; and level or declining long-term debt as a percentage of total capitalization.

Introduction:

The Elusive Goal: Low Risk and High Yield. The elusive goal for every trader is to achieve the combination of low risk and high yield. Is this ever possible? The market invariably brings you both good news and bad news. The bad news: Markets are volatile and risky, and any capital placed at risk could result in losses, at times catastrophic losses. The good news: These market risks can be hedged effectively using conservative options strategies.

Coupling the words “conservative” and “options” may seem surprising, since the long-standing reputation of the options market has been exotic, high risk, and inappropriate for many if not most investors, both institutional and retail. This does not have to be the case. The options market is becoming increasingly recognized as much more than a form of pure speculation. Today, growing numbers of investors are recognizing that options are most effective as tools for managing a portfolio, reducing and eliminating its risks through hedging strategies, and improving profits.

This book demonstrates how a conservative portfolio can be made safer and more secure, while increasing income. This is accomplished through the combination of equity positions with specific and conservative options strategies. The intention is not merely to augment net profits but to protect the profitability of the equity side of the portfolio as well. This idea is dramatic in the positive effect it has on an institutional portfolio.

The problem every investor and trader faces is twofold: First and foremost, investment decisions must be conservative enough to protect against losses. It means that many opportunities must be passed up because the risks are perceived as too great. Second, the goal must be to match and beat inflation and taxes, the double impact that demands seeking higher returns. How can you seek higher returns in this portfolio, while continuing to observe the essential demand for conservative strategic management?

Many market insiders and experts are pessimists on this question. They point out that your chance is only through broad diversification of risk, and complex asset allocation as management tools. Both ideas present profound problems for every portfolio. Broad diversification means trying to attain the “vanilla” medium return of the market. A majority of mutual funds, for example, are broadly diversified but they underperform the market average. In fact, according to one source, the average actively managed stock mutual fund returns much less than the overall market.