Why don't more fundamental investors use options?

[stan255 0]

Most investors are categorized into a few groups such as the technical traders, fundamental investors, option traders, etc.

But why don't more fundamental investors use options in their strategy?

For e.g: Bob thinks AAPL is fairly valued and he is willing to pay $144 for it. Bob can sell a naked $130 put.

• AAPL goes up - He has his premium for selling the put option.
• AAPL goes down - Bob is happy to pay $130 for AAPL because he thinks he is getting a good deal.

What do you think?

[Kim 7,513]

Very good question.

I guess many investors just consider options too risky. Maybe they tried it at some point without full understanding what they were doing and were burned. But ignorance is not an excuse. Take Seeking Alpha as an example - they discontinued option category because "their site is for longer term investors"?? Don't they know how options can boost returns for all kinds of investors?

[Noah Katz 90]

The biggest impediment to me was resistance to learning how they work, based mostly on the difficulty of grasping the horribly chosen terms "cInsert other media all" and "put".

[stan255 0]

18 hours ago, Kim said:

Very good question.

I guess many investors just consider options too risky. Maybe they tried it at some point without full understanding what they were doing and were burned. But ignorance is not an excuse. Take Seeking Alpha as an example - they discontinued option category because "their site is for longer term investors"?? Don't they know how options can boost returns for all kinds of investors?

 

Hey Kim,

 

To me using options to boost your returns sounds like a no-brainer for a fundamental investor.

 

For e.g: Sell a naked put - Stock goes down to your strike and you get assigned. Win for you because you get to purchase the stock at the price you want. If the stock goes up, you get to keep your premium. Either way, you win unless there is a huge news that crashes the stock which is highly unlikely from a probability point of view.

 

What am I missing here? Or as you mentioned, 99% of fundamental investors are purely the buy and hold type?

Edited April 1, 2017 by stan255

[Kim 7,513]

6 hours ago, stan255 said:

 

Hey Kim,

 

To me using options to boost your returns sounds like a no-brainer for a fundamental investor.

 

For e.g: Sell a naked put - Stock goes down to your strike and you get assigned. Win for you because you get to purchase the stock at the price you want. If the stock goes up, you get to keep your premium. Either way, you win unless there is a huge news that crashes the stock which is highly unlikely from a probability point of view.

 

What am I missing here? Or as you mentioned, 99% of fundamental investors are purely the buy and hold type?

Well, the disadvantage of naked puts is that if the stock rallies more than the premium you got for the puts, then you miss all those gains. But overall, you are right, buying naked puts is usually better than just buying the stock. The fact is that CBOE PUT index outperforms the S&P 500 with less volatility.

Again, I believe it's mostly ignorance. 

[RapperT 336]

and misconceptions.  .  I post on another board with active trades and the vast majority still consider options "risky."

 

Also, selling naked puts works really well until it doesnt.  I personally dont do it anymore.  Easy to blow up.  Also, when you hear people talk about the track record selling puts they are almost never calculating return on margin.

[Kim 7,513]

Selling naked puts is a good strategy, but you need to be aware of the risks. Only sell the number of contracts based on number of shares you are willing to own. If you do it, even if the stock tanks, you still will do better than owning the stock.

As for calculating gains - yes, you are right. I had a discussion with someone who claimed to have  100%+ gains around 90% of the time. Turned out his "secret" strategy that makes "100%+ gains around 90% of the time" was selling naked puts.

According to him, "100% gains is keeping the entire option premium that I received as the result of the option contract expiring worthless."

However, there is a "small" problem: when you sell a naked put, there is margin requirement. And the only way to calculate gains is return on margin. Depending on the stock and the expiration, your return on margin is usually around 10-15% if your sell slightly OTM puts. Nowhere close to 100%+ gain. Yes, you can win 90% of the time if you sell far OTM puts with deltas of 10-15, but in this case your maximum gain is usually 3-5%. 

Unfortunately, internet is full of hype from people that will tell you what you want to hear. And this is what gives options a bad name.

Edited February 27 by Kim

[stan255 0]

8 hours ago, RapperT said:

and misconceptions.  .  I post on another board with active trades and the vast majority still consider options "risky."

 

Also, selling naked puts works really well until it doesnt.  I personally dont do it anymore.  Easy to blow up.  Also, when you hear people talk about the track record selling puts they are almost never calculating return on margin.

 

As a fundamental investor, I'm willing to own the stock at the strike price because I see it as good value. Unlike other types of traders where they don't want to get assigned because they are only selling it for the premium.

Edited April 2, 2017 by stan255

[RapperT 336]

5 hours ago, stan255 said:

 

As a fundamental investor, I'm willing to own the stock at the strike price because I see it as good value. Unlike other types of traders where they don't want to get assigned because they are only selling it for the premium.

oh yeah, dont get me wrong...i get it.

I've also noticed that some services report amazing win rates when in fact they are just rolling losers.  I think Karen super trader did something similar with her short strangles.

The Victor Neiderrhofer story is fun if you want a good example of blowing up selling premium

[cwelsh 1,505]

Oh I've been preaching this for years -- some view options as risky, others just don't understand them, others are just set in their ways.  My dad is the best example -- he's been trading some of the large pharmaceuticals for years (he's in the industry) and has done quite well.  His trading strategy is pretty simple, he determines that the company is worth $X (let's say $50).  Whenever it hits that price he starts buying tons of it and buying even more if it starts to decline.  Then when it gets to a point that he thinks is 50% over valued, he sells.

 

That means he's in cash 50% of the time (or more).  What he should be doing is, as suggested, is selling naked puts at the price point he wants to buy and then covered calls at the point he wants to sell after getting the stock.  It's the EXACT same strategy he uses, except he derives extra premium for doing it.  I ran a spreadsheet for him about three years ago -- in the preceding ten years he'd cost himself an average of 5.5% per year over an entire decade that would have been gained simply by using options. 

 

He still hasn't changed, nor do I think he ever will.