Today I want to talk about something that is often ignored, yet has a very large impact on the net performance of our trading and investing: Taxes. To illustrate the importance, I often like to point out both the power of compounding and the impact of taxes with a simple example.
Some ideas are simple at first glance but contain risks that mightnot be entirely obvious. Binary options are an example. Some traders love them, just as some roulette players are attracted to the appeal of “red or black” as a 50/50 proposition(or close to it, a 47.4% chance of winning due to the ‘0’ and ‘00’ possibilities).
One of the greatest benefits to trading options is that you can make money in an up, down, or sideways market. For example: In a bull market you can buy calls, or purchase bull call spreads and bull risk reversals. In a bear market you can profit buying puts, bear put spreads and selling bear call spreads.
Almost all passive investment strategies are based on the assumption that younger investors should hold more equities as a percentage of their total portfolio. Likewise, as they age and get closer to retirement, the allocation to fixed income assets should grow while equity holdings shrink.
Options traders do not have to act as gamblers … even though many do. There may be a thin line between trading and gambling, and that line is obscured when it comes to weekly options. If you utilize options to reduce risk, it is smart trading. But if you treat options trading like a bet on red or black in a roulette game, then you’re not hedging; you’re gambling.
Over the past two months, we have been working on developing a put selling strategy to implement through Steady Options, using Anchor as a partial hedge against market decline. However, back testing has been quite a pain, at least until I was directed to ORATS Wheel software.
What is the real benefit of diversification? Sometimes it's not completely intuitive to investors. Let me provide an example, using historical data of 2 Vanguard mutual funds, VFINX (S&P 500) and VUSTX (Long term treasuries). For fun, we'll compare the end result to Warren Buffett's performance as well, just to further drive the point.
Traders focused in stocks, ETFs, and mutual funds may avoid options for several reasons: Perception of high risk, complexity of the market, dizzying levels of specialized jargon. These concerns are part of the learning curve and can be overcome – if traders look at options trading as science and not just gambling.
A couple of months ago, I wrote and article for Steady Options titled – There’s Volatility To Be Found …. In Turkey. At the time, implied volatility had skyrocketed to 45% amid political turmoil and a falling currency. That level of volatility was a 12-month high, with vol previously being as low as 19%.
It is axiomatic that the largest investment returns typically come from investing in private companies. Peter Thiel initially invested $500,000.00 in Facebook, which was worth over $1b when he cashed out. Eric Lefkofsky turned an investment of $546 (that’s not a typo) into $386m in cashed out payments.
Options expiration dates and strikes are among the most important parameters options traders must consider. Today we have the well-known weekly, monthly, cyclical, and LEAPS options. A lot of choices. But is that as far as we can go? The realm of possibilities could be endless. Consider some of these possible expansions:
“Income” trading has become wildly popular for option traders since the global financial crisis. This style involves selling out-of-the-money options to a hedger and collecting the full premium payment at expiry — assuming the underlying doesn’t trend too hard in one direction.
