I like to read many different things that revolve around money. I spend time on Reddit finance related forums, personal finance blogs, finance related YouTube channels, and endless other news outlets like CNBC and Bloomberg. In essence much of my reading time for leisure, pleasure and work revolves around money.
I recently caught up on some personal finance blogs and this post from OfDollarandData intrigued me. Specifically this paragraph is what interested me:
This is why I’m not a fan of those who “generate income by selling options.” These people are trading immediate rewards for future risks. And when those future risks inevitably arrive, many of them get wiped out.
Everyone is, of course, entitled to their opinions but blanket statements like this illustrate a bit of ignorance about what options are and how they should be used in an investment portfolio. At a bare minimum, the over generalization is just as bad as saying “stocks only go up forever.”
Using a collar option strategy, you can essentially reduce your risk to zero and still manage to earn a nice return. Ironically, the link to my most recent collar on AMZN limits my risk and my greed by establishing a pre-defined outcome no matter what AMZN does through March 19, 2027. Using covered calls, you can reduce portfolio risk when a stock market is overheated. If you’re bullish on the market and it is a bull market you can sell put credit spreads and collect income with minimal risk.
There are so many different ways to use options strategies that I had AI help me write a post about them here. I’ve been trading options as part of my portfolio now for close to 20 years and have never had any major loss or issues with my trades and strategy. No, not every single trade is a winner, the entire point (as least for me) is to manage risk.
Where I do agree with Nick is that greed often takes over on success bias and people begin to feel invincible and take larger and larger gambles with their portfolios. The true problem isn’t trading options, it’s the emotional malfunction that is the problem. A hammer can be used to build a house or it can be used to bash someone’s head in. The tool is the tool, it’s how the person who wields and uses it that makes all the difference.
Options Ain’t For Everyone
It does take a good deal of study to understand the options market ecosystem. I can’t distill 20 years of options knowledge into a simple paragraph. Heck, I’ve now created at least 4 apps to help me manage the options data that is floating around out there to help me optimize the right strategy.
I went down this path because I’m lazy. Last year, I made $200k in returns. Some of that was options trading, some of it was dividends, and some of it was interest or capital appreciation. Think about that for a minute. I made $200k doing nothing but sitting at a computer and clicking buy/sell. You can stick to vanilla flavor of ice cream and enjoy it for the rest of your life if that’s all that you need to be content but I like to own and try all 31 flavors.
Options is a component of a well-diversified portfolio of bonds, stocks, foreign currencies, real estate, hobbies / small business, and your day job. It is a tool to help you manage risk but like a hammer, it can turn into a weapon that shatters your portfolio if you don’t know what you’re doing. Ultimately, that’s the core issue, a lack of understanding of how to use a tool.
Share The Wealth
What do you think? Are options evil or good? Or are they just a tool that can be used for good or evil dependent on the holder?