As has become custom, fellow Seeking Alpha contributor Kim Klaiman published an excellent article on options the other day - Myths and Misconceptions Of Options Trading. It's well worth your time. It not only offers excellent insight into options, but it highlights the diversity of thoughts that makes Seeking Alpha great.
Klaiman opens his article by taking another author to task for his views on options:
Klaiman goes on to shoot down a whole host of myths and misconceptions, including the notion that an options trade is not worth the time if he does not see it yielding 100% or better.
I do not use options in quite the same way Klaiman does. From what I can tell, he tends to trade them. That's not for me. I prefer to approach options, as much as is reasonably possible, from the perspective of a long-term investor. In other words, I tend to only enter an options trade if I am bullish (or bearish) enough on the underlying stock that I would like to own it or would be willing to short it outright. Put another way, I do not use options merely to generate income or smashing returns. I use them to bring a diversity to the way I follow my conviction.
For example, in the last issue (Feb 28) of my stock option investing newsletter, I offered up the following trade:
If and ONLY IF you would be OK getting long RL if you do not get your shares called away or the stock trade does not become profitable (in other words, you are long-term bullish and would be fine owning the stock on weakness), consider buying RL for under $175 and selling either the March or April $180 call. As of Monday's close, the stock traded at $174.46, the March $180 call fetched $1.45 and the April $180 call sports a bid of $4.30.
Here's my thinking behind the trade. I like Ralph Lauren (NYSE:RL). I want to own the stock despite concerns over the impressive run it's been on over the last year.
I remain long-term bullish, however, I expect to see a period of relative stagnation and maybe even weakness. That's taken place. If it holds through the middle of this month, the RL March $180 I wrote against 100 shares of RL will expire worthless. I got effectively got paid $145 to buy RL. If, for some reason, the stock soars and my shares get called away, I know what my profit is - 4.5%. Harris might scoff at that, but it's a nice way to come out of the situation.
At this point, however, it looks more likely that the $180 expires worthless. How often do most investors just haul off and buy 100 shares of a stock they like? They fork out $5 or $10 in commission and hope the stock rises. In my case, I use a low-commission broker, execute the buy-write covered call and collect $145 (roughly $140 after commissions) to buy RL. It's a beautiful thing. And, as a long-term investor, bullish on the stock, I can repeat this process - minus the buy part - by writing a call on RL month-after-month.
Similar logic applies to Apple (NASDAQ:AAPL). Some of the folks crying for an AAPL dividend label themselves long-term investors who somehow "deserve" this extra shot of income from their investment. You know how I feel about that. Frankly, the whole situation reeks of a pathetic helplessness. Apple does not pay a dividend, therefore I am going to whine, kick and scream about it until they do. I have no power in this relationship.
What a horrible attitude. Take this moment into your hand and take advantage of the situation. We all knew AAPL had to pull back sooner or later. It's doing so on Monday, down over $10.00. The AAPL March $555 call is down about $2.50 today. That means you could have sold it and collected around $800 on Friday. If you own 100 shares, an $800 payment for holding a call for two weeks makes a dividend look like chump change. If AAPL pays out a dividend of $10 a share, you'll only make $1,000 annually. You could make exponentially more than that writing covered calls against your position on a regular basis.
Of course, you do run the risk of seeing your shares called away, which is why you have to be picky with your strikes. But, if for some reason, you lose them, you know you've locked in some profit and can get back in the game on weakness, which always comes.
Bottom line - it's bad information that makes options a potentially dangerous game. Not writers like Klaiman. Bad options information and unrealistic expectations set up a recipe for disaster, but, more importantly, they introduce many investors to the subject from a position of ignorance.
If you go into something as inherently confusing as options in that way, there's no question you're going to lose money. It's not the option market's fault, though. It's yours with an assist to a bevy of bad information.
Long-term investors should not be afraid. Nor should they whine. We control our own destinies. And one size does not fit all. Where there's a will, there's a way. Pick the cliche. At the end of the day, more than one way exists to generate returns with options, just as with stocks. You just have to be willing to put in the time to learn the strategies and approaches that best suit your personality, investment style and life situations.
Additional disclosure: I am short the RL March $180 call.