Useful Secrets – Risky Investments and Non-Risky Investments

Posted on May 31, 2009
Filed Under Investments | Leave a Comment

Due to the recent dramatic drop in the stock market a lot of investors are looking for investment opportunities that are less risky than being 100% long the market. The point is that the market has proven to be too changeable for many investors. Every one would like to find ways to be invested and get much of the upside in the market but have some kind of “hedge” against declines in the value of our investments and portfolios. While trying to get this ideal position of benefitting from the upside in the market but somehow limiting their downside risk investors have looked to indexed annuities, hedge funds, market neutral funds, and broker sponsored “structured products”.

Unfortunately, there is a need to admit that with investing “there is no such thing as a free lunch”. Simply saying it is necessary for you to sacrifice something in order to get that downside protection. What are you willing to give up to decrease the risk of your portfolio? Are you willing to give up:

• the upside of a rising market in general
• liquidity
• low expenses
• simple investments that you can understand and track
• upside above a certain amount (like 5%-10%) in the case of a sharp market rally

In the case you chose the last one then the buy/write or “covered call” strategy may be one for you to take into consideration.

So, What Exactly The Buy/Write Investment Strategy Is?

Frankly speaking, this can probably considered to be the most commonly used, simple, and most conservative investment strategies that incorporate options. The point is that a lot of people think of options as being risky and adding to the risk of your portfolio. This strategy uses options to actually reduce the risk in your portfolio. It is essential for you to keep in mind that it is a “defensive” option strategy and it incorporates buying/holding a stock and “selling” a call option on the position your already own. So, it is possible for you to do this with individual stocks or exchange traded funds (ETF’s).

The other important question that should be answered is when you should use the buy/write strategy.

As a matter of fact, the downside of this strategy is if the market or your stock/ETF takes off and zooms rapidly and significantly upward. It should be also mentioned that if you will still make money but your gains will be limited or capped at a medium amount in the short term. If you are very bullish and 100% sure on the market or on your investment positions you would not want to use the buy/write strategy as it will limit your gains on any sudden significant increase in prices. Keep in mind that in the case you are not 100% certain in the market and think we may have a flat, down, or, even better, gradually boosting market then you could be better off using the buy/write strategy than being 100% invested in the market.

In addition, you should consider that the buy/write strategy will usually produce better performance than a fully invested long portfolio in decreasing markets, flat markets, or gradually boosting markets. The truth is that this strategy will have lower risk/volatility. Increased market volatility actually increases the attractiveness of the buy/write strategy according to the fact that higher volatility causes higher premiums/prices for the calls that are sold.

Lastly, you might want to know who should use this buy/write strategy. You see, even though this is a relatively plain and safe strategy involving options, you should keep in mind that it should still only be used by those investors who have already a lot of experience and are rather active while other investors may be able to get comfortable with it after doing thorough research and careful homework.

Find out why people make a hot trend on silver bullion investments.
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The review of HYIP PanaMoney published on HYIPNews.com

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