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Options, of course, are but a tool, a tool that can be aggressive or conservative, used or misused. Below we outline the options strategies that we employ most typically. In general, we use such strategies in a conservative manner to enhance performance or to hedge the overall account. However, clients must provide special authorization in order for us to undertake any options trades, and we ask clients to do this only if they are fully comfortable with what we are doing.
- We sell puts on stocks we want to buy. This enables us to buy the stock, net of options premium, at a lower price than we could have done otherwise. If the stock moves up, we do not buy the stock, but pocket the premium.
- We sell calls on stocks we own as a way of selling at an "above-market" price or collecting premiums if the stock does not move up.
- We buy puts from time to time, whether on indices or individual stocks, to profit from a declining market or specific stock; this also acts as a hedge on the overall account.
- We buy calls occasionally in order to increase leverage from short-term moves.
Sometimes, we will undertake strategies that involve a combination of option purchases and sales (such as selling a call and buying a put at the same time, to buy downside protection at no cost).
In order for us to undertake these strategies in an account, the client must sign special paperwork. By doing this, the client is authorizing us to undertake any options purchases and sales for which he has signed. If as a client, you do not want to authorize us to undertake certain transactions, then you should not provide that authorization.
Accounts may be limited as to strategies that can be employed by legal or other reasons. (For example, IRA accounts are restricted by law from certain strategies; trusts may be limited by the trust document or trustees; and brokerage firms must approve clients for certain options activities.) Margin is required for certain options strategies. In order for us to sell puts, for example, we must have margin authorization. We do not sell naked calls or undertake transactions using margin in the sense in which it is commonly understood; that is, your exposure would never be more than 100% of the price paid for the put or call, or the exercise price if a sale. When we sell a put, for example, we put aside the money required should the put be exercised.
As mentioned, typically, we use options to limit risk exposure. In addition, such strategies only ever comprise a small part of an overall portfolio.
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