You will see why I call these very good investment an orphan. But first lets get into the meat of what these guys are. Why they were invented and how they have evolved into such a great opportunity for the average investor to gain more than an average return.
Options have been around for decades. It wasn’t until 1973 that they began to be traded on exchanges and the common investor could use them. Before they were OTC (over the counter) and only institutions traded them with each other (kind of like the financial derivatives we have now). Once options gained the popularity that they did, they began to evolve. First they were only traded out as long as 9 months, now we have leaps. First they were only trade every 3 months, now you can trade the next two months (i.e. this article is being published in May so June and July are the front two months that trade). We do not want to get too much history, but it is important to understand the history a bit to see where we are now.
Calendars and Diagonal spreads are a combination of two separate option contracts. In the case of calendars, they are of the same strike price but different months. Diagonals are different strikes and months. Some examples of Calendars would be to buy the Jan ’09 and sell the June ’08 same strike in this example we could use 50 strike. A Diagonal spread would be Jan ’09, 50 strike but a June ’08, 55 strike. Notice on the diagonal we have two different strike prices.
One of the very first principles we learn in options trading is time decay. Most (I would guess about 97%) of options traders do not understand this and if they do they try to make it more complicated than it needs to be. (Greeks). So you can see you have the masses against you when you trade I this style, but then the masses are always wrong therefore you are already on the winning side.
It would take several more articles and volumes to explain the many intricate things in play with these strategies, suffice it to say my 30 years experience tells me only 3% of investors understand these things. So don’t be intimidated, you are in good company. If this is something (which I don’t know why anyone would not be) of interest, go to the links at the end of the article to find out more.
Now as to why I call them orphaned…. No brokerage house, no financial planner, not anyone but a few discounts even want you to trade these so they have no home for themselves to be pushed. Why??? Remember the history lesson, well options were scorned for their “Speculation” and have never recovered. I am in total agreement that for the novices it is speculation, but I challenge anyone to find a less risk for more reward scenario than options done right. Again time does not permit great details, but you can follow and learn.
“The business of investing can be like basketball: The game can turn on a dime. To be truly successful, you have to know how to handle the ball – and more importantly, how to correctly anticipate the ball. That’s what separates the ordinary player from the great player”
With over 28 years experience both as an advisor [ 3, (commodities broker) 6, (mutual funds) 7, (stocks, bonds, options) Life and health insurance] Participating in most forms of investments. From taking companies public to speculation.
Educating investors is easy. The web has too many sites to mention full of information. In the information age, there certainly is no shortage of information. Teaching investors to be successful is much harder today that it has ever been. Don’t mix information with success. With too much information, comes too much failures.
It sounds like a contradiction, but in reality, the educated end up being talking heads. The successful investors quietly live next door.
As an investor, advisor etc. It has been my greatest pleasure to see others grasp success in whatever level they are looking for.
