Conclusions

Options are sufficiently versatile that most individual investors can find a suitable strategy to adopt on a recurring basis. If an investor prefers to time his/her trades, then the strategy can be used at the appropriate time.

The main point to recognize is that an investor in John’s situation is not comfortable with current risk. That’s the #1 problem that must be solved. John could do one of the following:

• He could do nothing, remain worried, and hope for the best. This is a poor choice because hope is not a strategy.

• He could bury his head in the sand and pretend that markets always rise on average, and that there is nothing to fear.

• He could turn to the services of a professional financial advisor or financial planner. By taking this approach, John may not save any money in a market meltdown, but at least he can gain some consolation by telling himself that someone else is to blame for any financial losses.

However, there is another option to consider. The retail trader can take charge of an investment portfolio, recognize that no one cares about his money as much as the investor, and learn how to reduce the risk of investing at the same time that the probability of earning consistent profits is increased. Please understand that using options does not provide a guaranteed path to riches. You must be held accountable for the quality of your individual investment choices, but option strategies can be used to limit losses. Over the long term, limited losses and managing risk are the true keys to success.

Any investor can consider the alternatives and adopt one of a number of option strategies that improve the current situation. That means less risk and less worry. One point worth mentioning is that these are not all-or-nothing decisions. John may choose to protect a portion of the portfolio, leaving the other portion as is—unprotected.

You may argue that the days of buy and hold are not yet behind us, but wouldn’t it make you feel more secure to know that your portfolio is protected against a disaster? Intelligent use of options can help you achieve that goal.

When it comes to portfolio protection, options are under-utilized by the individual investor. If the idea of losing less when the market undergoes the inevitable declines appeals to you, and if you are willing to seek good (but limited) profits when the market rallies, then conservative option strategies deserve serious consideration.

Endnotes

1. Baer, Gregory and Gensler, Gary. The Great Mutual Fund Trap: An Investment Recovery Plan. Broadway Books: NY, 2002.

2. John Bogle is the founder and (now retired) CEO of The Vanguard Group.

3. Leverages ETFs are constructed for day traders and not investors. Nevertheless, many investors buy these ETFs and are underwhelmed by their poor performance.

4. For example: October 1987 Black Friday; September 2001 terrorist attacks in NYC; Autumn 2008 stock market gyrations—up and down.

5. Baer and Gensler.

6. To make the system efficient and safe, John does not have to be concerned with Mary’s ability to cough up the cash if and when John collects on his insurance policy. When the trade is made, John and Mary are separated and the OCC becomes the guarantor of all option contracts. In almost 40 years, the OCC has never defaulted on a single contract.