Options for Busy Investors

Option Strategies for Long Term Investors

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Both investors and traders can use options.

The accepted difference between investors and traders is that investors make portfolio changes far less often and they have the patience to allow their investments to grow. In other words, investors are not interested in instant gratification whereas traders prefer to make a trade, collect a quick (a few minutes to perhaps a couple of weeks) profit and exit the position.

Traders seek stock-market profits by selling as soon as their profit target (as written in their trade journal) is met. They never get married to a position. Nor do they have loyalty to the company whose stock they own, making it easy to unload the shares of an underperforming asset. They often ignore the nature of the company itself, relying on charts to make buy/sell decisions. Some traders own positions for as little as a few seconds, while others may wait as long as two months for a position to work. 

There is also another major difference. Trading is a full-time job because there is a continuous need to monitor positions and to make important decisions. Investing is something that anyone can undertake. Don't misunderstand. It is not a simple process. Instead, it requires an investor to find the time to do the necessary work for making important decisions. Unless you want to pay someone to manage your portfolio by buying mutual funds (a poor choice), ETFs (a good choice) or hiring a financial advisor (a good choice when the advisor acts as a fiduciary), the successful individual investor does his/her homework.

 

Investors 

Investors tend to hold positions for years, decades, or even an entire lifetime. As a consequence, they make few investment decisions. Investor portfolios should be examined on a regular basis (at least yearly) with the goal of unloading stocks that no longer deserve a spot in the portfolio.

Alas, that seldom happens and many buy-and-hold investors believe in holding forever. NOTE: Sometimes an investment is so successful that it comes to represent a significant portion of the portfolio. When that happens, the intelligent investor sells some shares so that the future portfolio value is not too dependent on the fortunes of a single company.

Timing is not a big issue for investors because paying a few cents more per share, has little effect on the long-term results. 

Investors should care about news and the company's progress, but there is never an urgency to make a buy/sell decision. They have time to carefully digest any news announcements and think about how it affects the longer-term prospects for the company.

Traders

Traders make a ton of trades and pay close attention to news announcements, such as earnings or an FDA report. They often make a quick buy or sell decision as soon as news is announced. 

Traders cannot work full time at another job and efficiently pay attention to their charts and news at the same time. When you have a full-time job, it is very difficult to trade short-term market moves. However, it is possible to adopt a limited-risk option strategy that allows you to make investment decisions when the markets are closed (and you are not at work).

 

If you are someone who considers him/herself to have a trader's mindset and if you are willing to own positions for at least a few weeks, and perhaps up to six months, then one effective strategy is the use of credit spreads. This strategy comes with limited profits (and limited losses) and a high probability of success. Best of all, this strategy can be used by people who cannot take the time to see what "the stock market is doing" during regular business hours.

To decide whether you are comfortable adopting this strategy, learn more about how the credit spread works.

If you prefer an easier-to-adopt strategy that requires a mildly bullish mindset, then learn about two specific strategies that work well for investors who want the value of their portfolio to be less volatile (rise by less in bull markets and fall by less during bear markets).

Those strategies are writing covered calls and selling cash-secured put options.

Busy people can use options to enhance the long-term value of their portfolios. Should you become one of them?