"The options-based strategies can be
useful in improving the risk-return
characteristics of a long equity portfolio."
Although this paper goes into more specific
option strategies that other studies, the results are very similar: Basic
option strategies accomplish two useful things for conservative investors.
First,
returns are modestly enhanced. Please note the word "modestly." I am
not telling you that using options will make you rich. But, over the
longer-term, you can anticipate being farther ahead when using some option
strategies as part of your overall investment plan.
Second,
the value of your portfolio undergoes smaller changes (i.e., smaller ups and
downs).
"Ignoring early exercise for
simplicity, we find that the covered combination and covered call strategies
generally outperform the long stock strategy, which in turn generally
outperforms the collar and protective put strategies regardless of the
performance measure considered. "
Thus:-
·
Writing covered calls generally outperforms the buy and hold
(stocks) strategy.
·
Writing
covered combinations (i.e., owning 100 shares of stock and writing one OTM call
and one OTM put) outperforms the simple buy and hold strategy.
However, owning stock produces better results
than ultra-conservative strategies. That is understandable, because the primary
objective for very conservative investors is the preservation of capital, with
the ability to earn a good return being of secondary importance.
·
The collar strategy does ensure that the investor's losses
are limited, regardless of how far the stock price may tumble. However, the
collar investor always earns less than the buy and hold strategist -- over the
longer-term. In other words, insurance costs money.
·
The
protective put strategy involves owning both 100 shares and one put option. The
put generally has an out-of-the-money strike
price. This is similar to the collar strategy,
but does not involve the sale of an out-of-the-money call option. The investor
who adopts this strategy pays a stiff price for portfolio protection, but is
able to fully participate in all rallies.
Equivalent Positions
Because some option positions are equivalent to
others, it is not necessary to adopt the methods mentioned above in order to
achieve the same financial results. For example:
·
You
can sell cash-secured (i.e., if assigned an exercise notice, you have
sufficient cash in your account to buy stock) naked
put options instead
of writing covered calls. However, please note that the expiration and strike
price of the put and the expiration and strike price of the call must be
identical in order for the results to be equivalent.
