When markets run out of assets to be bullish on, my industry will resort to talking up options trading. This is natural as you can be profitable strategies regardless of whether markets are bullish or bearish. I am not into options because they are zero-sum games. For every option you buy, someone has to write it to you.
The options writer and options buyer can both be profitable at different times.
But the author wants to give options a chance. He wants to examine whether options can improve the expected utility of a portfolio. Even after analysis, the author believes very little about how options can provide a significantly higher Expected Utility for the investor. According to the author, investors can vary the proportion of their equity allocation in place of buying options.
It gets even worse when we consider the costs of playing options, which often comes with a wide bid-ask rate. Odds are most retail investors will be losing out to the brokerage houses and financial institutions who usually take the other side of the trade and have sophisticated tools to assist them.
Interestingly, the book does consider one specific scenario where the use of options would make sense. For young investors, according to Ian Ayres and Life Cycle Investing, it makes sense to leverage their equity portfolio using options to get more than 100% exposure to the asset class.
But of course, some investors can treat long-shot options bets like lottery tickets.
Just keep your positions small and utilise only fun money to do this.
[ The next chapter of the book is on taxation; we will skip to the last chapter I will review tomorrow and end this series of articles. ]
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