As interest rates on safe yield fall and stock prices climb to all-time records it may be worth looking at including options in your portfolio.
While not often a part of the average investor portfolio and not well understood, options have unique potential uses.
What are options - Insurance
A simplified way to think about options are as tradeable insurance contracts on stocks, indexes and some other investments.
Options can be used in a variety of ways but should be thought of as tools to control the structure and risks within a portfolio. Options can provide diversification, generate income on cash or on current holdings, manage or “hedge” risk, and can be used to express speculative bets (we don’t generally use them in this way).
You should think of options themselves as neither risky nor safe. You may construct options positions that run the range from extremely conservative to outrageously speculative.
Why might someone consider using options today?
1) Generating income on uninvested cash.
a. We believe that relative to other risks in the cash or safe yield category, the returns associated with options premium are more attractive relative to their risks.
b. In cases where our clients would prefer not to own equities at current levels, rather than sit around and wait for prices to go down we are structuring positions which express that willingness to own stocks should they decline
2) Risk reductions and hedging
3) Return enhancing
While options aren’t for everyone, it’s our view that there is no reason not to include them within your overall investment toolkit.