Let’s take a look and see what exactly is regarded as the ideal investment.

When asked to define what the ideal investment is investors have various versions of what they consider to be the ideal investment or the Holy Grail of Investments. In the ultimate analysis, with few exceptions, most investors feel that an ideal investment should provide the following qualities: safety of capital, consistent high returns, immunity from economic and market fluctuations and finally, liquidity, or availability of funds should the investor find an immediate need to tap his resources. Safety of capital and high returns seem to be the most desirable of all yet these two are totally opposing qualities in any investment. As the saying goes, the higher the risk, the greater the reward or inversely, the lower the risk the smaller the reward.

That said let’s explore our choices. Until the advent of options there appeared to be nothing that came even close to being called an ideal investment let alone be called the Holy Grail of Investments. We had to face the fact that investments were either low risk low reward or high risk high reward. Some investments were somewhere in the middle ground but few or none were in the Holy Grail category. Investors may be classified into two groups, passive and active investors. Passive investors prefer entrusting their capital to third parties and doing nothing more than expect returns from their investments either on a regular basis or value appreciation over time. They put their money into a fixed return instrument such as passbook savings accounts, money market funds, treasury bills, certificates of deposits, bonds and included in this lot are dividend paying stocks and mutual funds. Then there are the other passive investors that prefer to place funds into long term appreciation assets with capital growth as their main goal. Examples of these types of investments would be real estate, precious metals, arts and antiques. All these investment instruments while delivering small returns on a year-on-year basis do offer much safety of capital.

The active investor on the other hand is a more adventurous individual. He seeks high returns for his money, hopefully at reduced risk, by actively being involved in trading the markets, be it real estate, stocks, bonds, commodities, futures, foreign exchange, options or whatever else can be traded and made money on. Although more of a risk taker he nevertheless tries to moderate his risk exposure by restraining his profit objectives or rates of return on his capital. While passive investors are happy with annual returns of 6 to 10 percent, active investors seek higher rates of over 12 percent and more like in the region of 14 to 18 percent per annum. Is this doable? Yes, it is and many are happy actively trading the markets and achieving these returns using their own trading techniques that somewhat controls risk to an acceptable degree. Now here’s the shocker. Option traders are able to generate annual profits in excess of 20 percent without exposing themselves to any more risk that those achieving 14 percent. Now here is an even greater shocker. Among those that trade options the ones specializing on the selling side generate annual returns in excess of 30 percent with many averaging annual returns in the region of 40 to 50 percent without increasing the risk factor any more than the passive investor!

Foreign currency traders as well as commodities and futures traders sneeze at this claim saying that they can outshine the option seller in annual returns. True. But can they claim to do so at the same risk level as the passive investors? Most probably not.

Selling options (stocks, commodities, futures, etc) has become for many the Holy Grail of Investments. To the experienced option seller this trading strategy offers high, consistent returns, a fair degree of immunity against economic and market fluctuations, liquidity, and finally safety of capital. This last claim may be open to debate from non-believers in this trading strategy. To be fair let’s qualify the safety claim by saying that the inexperienced option seller is open to potentially heavy losses if he does not know what he is doing. But to the seasoned trader selling options is a safe investment strategy delivering all the qualities of an ideal investment to the point where successful option sellers claim to have found what to them is the closest one can ever get to the Holy Grail of Investments. Selling options on stocks, which is the specialty of this writer, can be particularly rewarding using a carefully planned trading system combined with disciplined money management and with proper safeguards in place. There are many trading strategies in selling options. Some are simple enough, like the covered call technique, delivering fairly decent returns while others are more complex but more rewarding. There is one option selling system developed by this writer that can be carried out as a long term investment program offering a fair degree of safety and delivering consistent high returns time after time. By using a carefully planned, three-pronged system of trading, the risks associated with selling options can easily be conquered.

This writer has mastered this three-pronged trading technique and anyone wishing more information may visit his web site at http://www.theoptionseller.com

• to find an investment vehicle that would effectively preserve capital and minimize risk in the face of a fluctuating and constantly flexing economy

• the investment vehicle must provide better than decent yields in all economic conditions to promote constant growth of capital value.

With the stock market as the premiere choice due to its historical record of outperforming all other investments over time, people are increasingly turning to the stock market as their main investment vehicle for future capital growth. It is here where much higher rates of return can be made with a relatively small increase in risk to capital.

With thousands of books, manuals, internet sites, seminars and courses offering investment strategies and trading systems in the stock market and its derivatives, there are few, if any, that deliver the ideal investment vehicle sought by the long term investor in search of safety and high returns. Not only is there a near total absence of an ideal investment system but there are many that promise eye popping, mind boggling returns and, they are exactly that; mere promises.

Most of the trading systems offered are structured on strategies or activities that work when conditions are ideally suited to the program being peddled. Most of their successes are highly dependent on picking the right stocks at the right time. In other words you must be a good stock picker or use a stock picking service (for a high monthly fee) to select the right ones for you. Market timing is also an important factor in their systems. Again, you must be a good market timer or depend on a service that provides market timing signals (also for a high monthly fee). These supposedly high yield investment programs don’t say anything about how bad things can be when conditions go against their predictions. These programs do exactly as promised: great when the going is good but disastrous when the going is bad. Without doubt many have been taken by these so-called services and while an investor/trader may be successful for a while, the end result over a long period of time is always the same – no better than if you had done the selections yourself.

While there is no one investment system or vehicle that can be an answer-all to the various goals of various investors, there are some investment alternatives that can come close to satisfying the two basic needs of safety and decent returns. Diversified mutual funds have been touted as the answer to these basic needs. But over the years these funds have shown that during downturns in the economy they perform just as badly as the whole investment market in general. And, over the long term, many of these diversified funds have failed to even match market performance in general, much less outperform it.

Enter market derivatives with emphasis options.

Trading in stock options has become very popular with institutional investors as well as private individuals as a sound money management system supplementing their investment portfolios. The ability of stock options to give the investor a wide range of choices is what has made the options market grow considerably over the last two decades. To quote one options expert: “Stock options are the greatest wealth producing tool ever invented on this planet. . . . if you know how to use them”.

The key element of this statement is: . . . if you know how to use them.

For many people the mere mention of stock options, sends shivers up their spine. They look at options as synonymous with great risk. But isn’t driving a car very dangerous for one who doesn’t know how to drive? The ability of stock options to give the investor a wide range of choices in stock market investments is what has made the options market grow by leaps and bounds over the last twenty years. Statistics compiled by the Options Industry Council, a group that educates investors about options, show that volume in options trading has risen tremendously in recent years. Further, studies show that individual investors make up 60% of the market.

For the individual who has sufficient funds and is looking for more than a decent return on his capital and with controllable risk, stock options may be the answer.

There are dozens of option trading systems being employed by individual investors and institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value. Another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is popularly known as covered call writing.

Of the dozens of option trading systems there is one that can be carried out as a long term investment program offering a fair degree of safety and consistent high returns over time, thus satisfying the investor’s two basic needs of safety and return.

This is the selling of uncovered or naked options.

But wait! Is it not said that selling naked options carries the risk of unlimited losses? Isn’t this a contradiction?

Indeed selling naked options when done carelessly and without a disciplined strategic program is extremely risky!

But by using a carefully planned and disciplined system of trading, the so-called “unlimited risk” factor in selling options can easily be conquered. There is a three-pronged trading strategy being used by one successful options trader that is proving to be a consistent winner in all market conditions. It is a trading technique that couples naked option selling with a modified ratio credit spread and the use of the roll over feature. While naked option selling has acquired a bad rap of being highly risky, this three-pronged trading strategy allows the trader to defeat the risk. Not only is the system able to substantially reduce the risk, it also offers one the ability to become a savvy investor/trader without having to depend on picking the right stocks or timing the market.

It involves utilizing the system in any market condition using only one or a few stocks, ETFs or indexes (the latter two are more effective). One need not worry about finding the right stocks or timing the trades. The fact remains that stocks behave, more often than not, in crazy and irrational ways so that one can almost say that consistently choosing winning stocks is as good as a random walk down Wall Street. Rather than be proactive and try to predict and time the market, as many try to do, this three-pronged investment system is reactive. The prescribed trades are done in reaction to how the market has moved, not in anticipation of its future behavior.

This three-pronged trading system does not promise quick profits or mind boggling yields but steady annual returns in excess of 30%. Many are averaging returns of 50% to 60%. It would be prudent to say that in times of deep downturns the system may not deliver the promised returns but it will hold its own and will definitely outperform the market.

One options trader that has mastered this three-pronged trading technique has decided to share his knowledge of the system by writing an e-book on its methodology. Borrowing from that quote about options being a great wealth producing tool he has aptly titled his work: STOCK OPTIONS: THE GREATEST WEALTH BUILDING TOOL EVER INVENTED. In it he details the step by step methodology of this trading technique and gives an exhaustive series of sample trades covering several months of transactions. It shows the effectiveness of the system in an up market, down market and horizontal market using only one ETF stock. To this day the writer continues to use only one or two ETFs in all his options trades and he includes a web page that shows his current and actual trading results month by month on an ongoing frequency.

Let’s be clear on this. There is no other option trading strategy that can outshine or even equal the profit generating potential of the sport of writing naked options. The term ‘sport’ is used here because those who practice this money making trading technique not only turn out fabulous profits but also have fun in the process. It is a fun, profitable but dangerous option trading sport that is mostly played by seasoned and skilled option players. That is, until the sport’s peril’s were tamed with the use of trading techniques that, while offering substantial safeguards to the player, still continued to offer high profitability ratios, albeit at slightly reduced rates. Having made it ‘investor safe’ has only slightly altered the profit potential of writing nakeds and certainly, without doubt, continues to be the premiere money making trading strategy in the options market.

 

The birth of the options market in recent decades spawned the creation of dozens of trading strategies and systems that is today being used not only by individual options traders but also by financial institutions. Stock options as an investment instrument is now widely employed as a safe and sound money strategy. The ability of options to give the investor a wide range of choices in stock market investment is what has made the options market grow by leaps and bounds over the last two or three decades. There are dozens of option trading systems being employed by individual investors as well as financial institutions. Each system is designed to accomplish a specific investment goal. A financial institution may use long put options to hedge its winnings in stocks that have appreciated in value, another investor may buy call options instead of stocks to enter a position in a security that has caught his fancy. Still another may sell calls against his stock holdings to generate income from his stock position, or what is now popularly known as covered call writing.

 

Trading strategies, techniques and systems available to the option trader are so numerous today that it would take a whole book to describe each and that would be just a brief description not a detailed explanation. It would be far beyond the scope of what we could cover in this short article. Most of the strategies are based on the principle of buying calls and puts or, variations of this strategy such as the use of spreads. The reason for the popularity of buying calls and puts and its variations is quite simple; limited or defined loss against the potential for unlimited and fabulous profits. This is what has driven thousands into the options trading game. But like everything else in life there is always a trade off. While the potential for fabulous profits against limited investment exists the reality of achieving such success is restricted. It’s almost like buying a lottery ticket with the potential for winning fabulous riches. Or putting it differently, it’s also akin to going to a casino and placing bets on gaming tables with the hope that at the end of the evening you will come out with more money than you came in. As we all know there are very few winners in casinos and that is why the gaming business offers tremendous profits for the operators.

 

But one can be an option trader and be in a similar position as the casino operator.  How? By being an option writer or seller instead of a buyer. For every option that is bought in the market, there must be a seller or writer of the option. These writers are the casinos in the options business. As the option seller you take the bets from the option buyers and since 75 to 80 percent of all options in the market expire worthless, you the seller pocket the premiums paid by the buyers when the options they bought expire worthless. For the benefit of those who are not familiar with gambling casinos, the winning odds of casinos over the betting player is only around 5 percent and yet they rake in profits from this business. Now imagine this, research and studies have shown that the option writer (seller) has better than 10 to 20 percent odds over the option buyer.

 

Option traders who successfully use the strategy of selling options consider themselves as having found the Holy Grail of Investments. And of all the variations in option selling strategies (just as many as there are in option buying), writing naked options is considered to be the Cadillac division. No other option selling system offers the profit potential of the naked writer.

 

So why aren’t there more option writers in the market? For two reasons:

 

 

 

 

 

It must be noted however, that option writing is fast gaining popularity among serious investors looking to grow their wealth at a steady, consistent and secure manner regardless of market or economic conditions. For those willing to venture into this lucrative field for long term capital appreciation don’t let the first reason above frighten you into inaction. There are many ways one can protect himself and conquer the element of ‘unlimited loss’ in writing nakeds. The author of this article is one of many successful naked option sellers. He has put out an e-book detailing a trading system that uses a three pronged strategy that trounces the so-called risk of loss to be almost neglible. Information about his system can be found at his web site.