Selling Stock Options – Is it the Holy Grail of Investments?
Those who make a living selling stock options believe that it is pretty darn close. Probably the closest an investor will ever get to the long sought “Holy Grail of Investments” or what is considered to be the ideal investment.
Let’s take a look and see what exactly is regarded as the ideal investment. When asked to define it, investors have various versions of what they consider to be the ideal, or the Holy Grail of Investments.
In the end, with few exceptions, most investors would tell you that an ideal investment should provide the following qualities: safety of capital, consistent high returns, immunity from economic and market fluctuations and finally, liquidity, or availability of funds should the trader suddenly need to liquidate his resources.
Safety of capital and high returns seem to be the most desirable of all yet these two are totally opposing qualities in any investment. As the saying goes, the higher the risk, the greater the reward or inversely, the lower the risk the smaller the reward.
That said let’s explore our choices. Until the advent of selling options there appeared to be nothing that came even close to being called an ideal investment let alone be called the Holy Grail of Investments. We had to face the fact that investments were either low risk low reward or high risk high reward. Some investments were somewhere in the middle ground but few or none were in the Holy Grail category.
Investors may be classified into two groups, passive and active investors. Passive investors prefer entrusting their capital to third parties and doing nothing more than expect returns from their investments either on a regular basis or value appreciation over time.
The active investor on the other hand is a more adventurous individual. They seek high returns for their money, hopefully at reduced risk, by actively being involved in trading the markets, be it real estate, stocks, bonds, commodities, futures, foreign exchange, options or whatever else can be traded and made money on. Although more of a risk taker they nevertheless tries to moderate their risk exposure by restraining their profit objectives or rates of return on his capital. Selling stock options are considered one of the best investment strategies.
Selling Stock Options – Risk vs Return
While passive investors are happy with annual returns of 6 to 10 percent, active investors seek higher rates of over 12 percent and more like in the region of 14 to 18 percent per annum. Is this doable? Yes, it is and many are happy actively trading the markets and achieving these returns using their own trading techniques that somewhat controls risk to an acceptable degree. Now here’s the shocker. By selling options, traders are able to generate annual profits in excess of 40 to 50 percent without exposing themselves to any more risk that those achieving 14 percent.
Foreign currency traders as well as commodities and futures traders sneeze at this claim saying that they can outshine traders selling stock options in annual returns. True. But can they claim to do so at the same risk level as the passive investors? Most probably not.
Selling stock options has become for many the Holy Grail of Investments. To the experienced option seller this trading strategy offers high, consistent returns, a fair degree of immunity against economic and market fluctuations, liquidity, and finally safety of capital.
This last claim may be open to debate from non-believers in this trading strategy. To be fair let’s qualify the safety claim by saying that if you are inexperienced at selling stock options, you’re open to potentially heavy losses if you don’t know what you are doing. But to the seasoned trader selling stock options is a safe investment strategy delivering all the qualities of an ideal investment to the point where successful option sellers claim to have found what to them is the closest one can ever get to the Holy Grail of Investments.
Selling stock options can be particularly rewarding using a carefully planned trading system combined with disciplined money management and with proper safeguards in place. There are many trading strategies in selling options. Some are simple enough, like the covered call technique, delivering fairly decent returns while others are more complex but more rewarding.
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