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  • Writer's pictureTrusha Desai

Buy or Sell

Buy or sell call options: a strategy for sophisticated investors

Chart copyright Trusha Desai Innovation Management Inc.

Buying a call option is an effective investment strategy in a bullish market. However, are we always certain of the direction of the market or the underlying? Even if we study the fundamentals and technical, read the insider reports, estimate the earnings, trend the dividend growth and peruse the analysis reports for good measure, there is no certainty in life. I guess Warren Buffett will definitely tell you that, for Berkshire Hathaway does not go up every day. If it did, it would hit the roof and aim for Jupiter.

If we own the underlying, a vanilla call strategy might be optimistic. However, in this strategy, are we going to cover in the money or out of the money? If we are too close to the underlying for comfort, or if the underlying’s stock price exceeds the strike price at some point before expiration, there is the threat of being assigned. Unless being assigned is part of our investment strategy, it is essential that we monitor our underlying’s price regularly. It is essential that we exit our vanilla option before that becomes an expensive proposition.

Therefore, we can safely state that a vanilla option is not for everyone. If we do not wish to get an apoplectic fit, we may wish to stay away from vanilla. If we are more sophisticated investors, we may choose to strangle or straddle or simply butterfly. However, if we have not studied these strategies in detail, we may stick to the tried and trusty “buy-and-hold” and live off the quarterly dividends … for it may be the only “safe” strategy we could pursue. Of course, we can invest in gold, we can invest in futures, or simply real estate: all of these strategies have different risk ratios, of which we must be aware. Perhaps, stashing the cash may be the only consideration if our risk aversion has boundaries. Please be aware that propensity to risk should decrease with age: that is, risk and age must be inversely correlated.

Along with accounting, GST, year-end, personal taxes (focusing on extensive Capital Gains schedules), QuickBooks, Sage 50 etcetera, I also do investment analysis. I am available to give you a second opinion on your investments.

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