Create Your Own Hedge Fund explains how exchange-traded funds can be used in conjunction with an options strategy to attain steady growth. Beginning with a tutorial on options and ETFs, the book goes on to describe both investment approaches in great detail providing you with a trading strategy that generates higher returns than buy-and-hold investing — and allows you to reduce risk by adopting a hedging strategy. Filled with in-depth insights and expert advice, this book is intended for you if you’re a sophisticated individual investor or a professional investor, trader, or other money manager looking to update your arsenal of investment tools.
Investing is not a game. It’s a project that must be taken seriously, as your future financial independence is at stake. It requires an understanding of the risks and rewards of investing. Successful individual investors who make their own decisions devote a great deal of time and effort to avoid making bad decisions. Some spend countless hours poring over annual reports and 10-k filings in an effort to find companies that have the potential to earn great profits in the future (fundamental analysis). Others spend time with charts and graphs, attempting to use price and volume data to predict future stock prices (technical analysis). If you follow the methods taught here, you can be spared those hours of research. Individuals, on average, are not able to find those great companies, and unless you have a proven track record of consistently outperforming the stock market averages, it’s less risky to own a diversified portfolio, such as those represented by ETFs. Those investments can be hedged with options, reducing risk even further.
The methodology taught in this book does not guarantee profits. But it does present an investing strategy that increases your chances of being a successful investor. It increases the odds that your portfolio outperforms the market averages on a consistent basis, and it reduces your overall investment risk. Those are not just idle claims, and statistical evidence is included to support those claims. The path to investment success discussed in this book uses neither fundamental nor technical analysis. The recommended strategy is one that you, an individual investor, can readily adopt for yourself.
That investment method involves:
- Asset allocation: Determine the portion of your assets to be invested in the stock market and in other asset classes, such as bonds, cash equivalents, real estate, collectibles, and so forth. The methods discussed here are limited to working with the funds allocated to investing in the stock markets of the world.
- Diversification: Using the teachings of modern portfolio theory, you build a portfolio of stock market investments. Building an appropriate, diversified portfolio (diversification reduces risk) is much easier to accomplish than you might believe. You’ll learn to use the modern version of the traditional mutual fund, the exchange traded fund, as the back-bone of your portfolio.
- Stock options: We’ll explode the myth that options are dangerous. This versatile investment tool can be used conservatively and intelligently to enhance the performance of your stock market portfolio. You’ll learn to adopt an easy-to-understand options strategy that both enhances performance and reduces risk even further.
- Modern Portfolio Theory
- Can You Beat the Market? Should You Try?
- Hedge Funds
- A Brief History of Mutual Funds and Exchange Traded Funds
- Traditional Mutual Funds
- Exchange Traded Funds
- What Is an Option and How Does an Option Work?
- More Options Basics
- Why Investors Buy and Sell Options
- Option Strategies You Can Use to Make Money: Covered Call Writing
- Option Strategies You Can Use to Make Money: Uncovered Put Writing
- Historical Data: BuyWrite Index and Volatility Index
- Building a Portfolio
- Finding Your Style: Choosing an Option to Write
- Covered Call Writing in Action: A Year of Trading
- Uncovered Put Writing in Action
- Odds and Ends and Conclusion