Options Strategy

As discussed on the About page, our ultimate concern is the preservation of your capital, followed by the ability to generate consistent free cash flow.  Our Options Strategy generates cash flow for your account in three ways:

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• Options income – We write cash secured puts, meaning your account has the full amount of cash necessary to cover the put liability, which ensures that your account is never leveraged.  As an example, if we wanted to write a $100 put on XYZ stock, we set aside $10,000 ($100 per share x 100 shares) of your cash balance to buy the shares if necessary.  If shares are assigned to us, we write covered calls.  We only write put options on stocks we want to own as we take possession of the underlying shares instead of buying back a put contract at a loss.  We love selling put options on high quality companies as it gives us the ability to name our price and get paid to wait. We write options to express an opinion on the underlying stock, not because we believe the option itself is over or undervalued (we do not believe we have built a better Black-Scholes mouse trap).  If we believe the option provides a healthy return and a good entry for the underlying stock, we will trade it!

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• Dividends – One of our primary considerations when analyzing companies as potential option candidates is the dividend.  We look for companies with sustainable, growing dividends so you are paid to wait if the shares are assigned, and we often strategically sell put contracts that would put us into the stock before shares go ex-dividend.

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• Interest on your cash balances – You earn interest on the cash used to secure the put options, a bit like having your cake and eating it too.  Our custodian, Interactive Brokers, currently offers an annual yield on cash balances of over 4%.

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The strategy is simple and straight forward. It is also time-consuming. But the risk tolerance has been very manageable for us, due in no small part to the fundamental and valuation considerations of our team. 

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General Strategy

While the Options Strategy is our bread and butter, we also manage accounts for clients under our General Strategy.  The General Strategy is more flexible than the Options Strategy, allowing for positions to be established in a security by any means necessary (e.g., purchase of shares, short sale of shares, options contracts, etc.).  The General Strategy also generates consistent options income, though the income level will be less than the Options Strategy.