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How NOT to Invest in Options!

If we described an investment that can add income to a portfolio, reduce volatility and provide downside protection, would the average investor be interested? We think so!

A recent article in the Wall Street Journal titled, “Amateurs Pile into 24-Hour Options: ‘It’s just Gambling’” certainly caught our attention. 

As a reminder, an option contract gives someone the right to buy (call option) or sell (put option) a security at a certain price by a certain date. For that right, the investor pays a “premium”. The seller of that option collects that premium. Because of the smaller dollar outlay of a premium, investors often “bid up” these premiums, meaning they can become more expensive (relative to their intrinsic value) than they appear to be. Thus, it is estimated that approximately 80% of option contracts expire worthless!

As we have written about many times, options trading is exploding on Wall Street and, unsurprisingly, Wall Street is finding fresh ways to capitalize on this frenzy. One particular product becoming extremely popular is called “0DTE” options; that is, options that have zero days to expiration….(meaning the option contract is only for one day!). Without going into too much detail, this is--quite frankly--just speculation, if not pure, outright gambling. In fact, we are not sure we can think of a worse way investors should be using options….(Well, there actually is one worse way; we’ll touch on that later).

Nonetheless, it is estimated that Wall Street firms made more than $2 billion from client options trading last year--more than double what they received from stock orders. And even more disheartening, this new hyper-short-term options’ trading is attracting the attention of the ETF industry on Wall Street which sees it as an easy way to increase profits; just a few days after the Wall Street Journal article, Bloomberg wrote a piece titled, “ Zero-Day Options Boom is Spilling Into $7.4 Trillion ETF Market”. Investors can now buy an ETF that “invests” in zero day options! How exciting! (No, not really…..)

Today, it is estimated that 40% of options activity is now same day expiration, and between 2019 and 2021, investors notched losses of $2.1 billion in option trading with the most of it coming in these shorter-dated trades.  Again, this frenzy is NOT investing, this is just gambling and speculation! Perhaps the only way worse for investors to use options is the way one of those “sophisticated” Wall Street firms did a few years ago--by using LEVERAGE and selling UNCOVERED options.  And although this firm actually marketed it as a “conservative, yield enhancement” strategy, this is THE riskiest options strategy that can be undertaken.  Sure enough, investors suffered huge losses and many ended up suing the firm.

We’ve long said investors should embrace the incredible product innovation in the ETF industry; and for those who have the knowledge, CONSERVATIVE options strategies can be very advantageous.  We stand by these concepts.  BUT…..Investors MUST do their homework and be extra careful with more complicated products. In more cases than not, investors should stay away from Zero date options. At NCM, we use options to add income, reduce volatility, and provide some downside protection, as we stated in our opening line. The product innovation with ETF’s and mutual funds in terms of using options this way has been spectacular!

If you would like to learn more about why we use these investments in our portfolios, you can view a video we did called "Harvesting Volatility!"

In summary, as we have always said, options are a very misunderstood and poorly marketed strategy and unfortunately, too many participants are more interested in finding ways to generate fees and commissions instead of finding suitable strategies to help enhance investors’ chances of achieving financial independence.

Please feel free to reach out to us if you should have any questions on how these types of strategies might help diversify your investment portfolio.

We look forward to speaking with you.


NCM Capital Management

Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.