Benzinga recently had a chance to speak with Leav Graves, founder of SamurAI, about the advantages long-term options buyers have over equity ETF buyers. SamurAI is devoted to building artificial intelligence technology that can help professionals integrate option trading into their portfolios.
Graves said option buying gets a bad rap because too many traders don’t properly account for risk. He also noted the time value decay in short-term options can be difficult to overcome.
“Because it is really hard to time the market, buying options for the long-term gives you two much-needed benefits: It reduces the exposure to loss due to time decay, and it gives the position a longer time to bear fruit,” Graves told Benzinga.
An Example
Graves provided one simple illustration of the power of buying long-term options over buying one of the most popular equity market ETFs, the SPDR S&P 500 ETF Trust SPY 0.39%.
The table below includes the annual returns of the SPY ETF (dividends included) and the returns generated from buying at-the-money SPY call options one year out and rolling prior to expiration.
“When analyzing the table, we can see that options generated much higher return in percentages and provided high leverage (15.6 on average),” Graves explained.
Of course, the horrendous -94.4 percent return in 2015 highlights the importance of another key aspect of the strategy.
“When buying options, it is easy to lose 100 percent of the money you invested. This is why the risk management is being done by leaving part of the portfolio in cash and not compounding the return,” Graves added.
By not compounding returns, traders using the strategy above are capping…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
