Implementing options trading as part of your portfolio offers more than just consistent returns through cash flow and compound interest. With proper positioning and timing, writing options against securities in your portfolio can help protect you against a volatile market, as well.
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Description
Implementing options trading as part of your portfolio offers more than just consistent returns through cash flow and compound interest. With proper positioning and timing, writing options against securities in your portfolio can help protect you against a volatile market, as well.
It’s really a win-win for your portfolio. If the sold option expires worthless, that’s cash flow in the bank. However, if you position the option properly and get assigned, you exit a security that would have had an adverse effect on your portfolio had you maintained the position. Yes, you’re out the position, but if you were iffy enough to write an option against it for the express purpose of protection, you’re ahead in the game. Remember, you can always re-enter that security later if its chart start improving. The old adage applies here, too: the trend is your friend.
Do note that timing is important in utilizing portfolio insurance. If you write the insurance covered call while volatility is low, you won’t get much of a premium for its sale, and it’s likely just a normal covered call that will generate cash flow for you. However, if you wait until the security is already careening in a direction you didn’t want it to, it’s likely too late to completely salvage the position. It’s a simple matter of paying attention to what’s in your portfolio and acting accordingly when the time is right.
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Notes
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