Covered calls and cash secured puts are not bad strategies or snake oil. But, they do have some flaws. If you had your entire net worth in them over the last year, and you wanted to retire in 2008 or 2009, it would probably be hard, since most stocks are down 20 to 40% this year.
The trick to the investment game is picking the right strategy for the market conditions and your own personal station in life, given your risk tolerance.
I still trade covered calls, but I am young enough to be able to weather the stock price drops that have happened recently. Some investors who are nearing retirement may not be in that same boat.
So, the trick is to move toward less risky investment methods as your near retirement or a stage in life where you won’t be working any longer.
For the more risk averse investor, the married put/collar strategy may be more appropriate, because it protects the capital at risk, unlike the covered call and naked put.
Playing cash secured puts can be very lucrative and it is probably smart to know the in’s and out’s of trading them no matter what kind of investor you are, but to assume that you can invest your whole net worth that way forever, may not be prudent, many this year can attest.
We make it our mission to support and educate investors in all options strategies, you have to decide what strategy makes sense for you given your other investments and risk tolerance.
I'm Kurt Frankenberg, and I have discovered how to truly put the odds on the side on the individual investor.
Can you please give an example of a proper married put/collar that shows the reduced risk?
By definition, any trade that has long stock is more risky than a trade that includes long stock and a long put at the same time. Any strike put will help protect the downside of the stock during the trade.
Any time you have long stock and long put on that stock, the potential risk in the stock trade is reduced.
The trick to trading RadioActively is to use the “right” put – one that is in the money and out far enough in time that you are buying a very low time value.