Posted on Monday, 4th January 2010 by admin
The Break-even-or-better strategy is designed to either (1) show a profit for the year or, (2) at least, show no loss.
How:
A portfolio invested in 1 year Treasury bills, purchased at a discount and
maturing at face value provides the cash, through the interest earned, to purchase (hopefully) attractively priced options.
Results:
Best case: If an investor is good at picking the right options on the right stocks
that rise or fall a good distance during the life of the options, the profits
can be significant. And the investor gets to reinvest the interest.
Worst case: The interest earned on the maturing Treasury bills offset the option losses (break-even).
Advantages:
Leverage and truncated risk (no margin calls; no short squeezes). No fuss, no muss.
Heads you win, tails you break even.
Sort of like visiting a casino that pays off if you win or returns your bets if
you lose. Not bad.
Caveat:
In an inflationary era, simply holding the same number of dollars over any period
of time constitutes a real loss of capital. Capital value hinges on
purchasing power and, as purchasing power erodes, so does capital.
That being said, I’m sure, at the end of some years, there are more than a few investors
that wouldn’t mind being in a break-even or better position. Know what I mean?
As an alternative, growth stocks, rather than options on those stocks, financed from the
interest earned from the Treasury bills in your portfolio, replaces wasting assets
with permanent assets.
Results: Win, lose or draw, the stocks are yours for better or for worse,
for as long as you both shall live.
Seriously though, if you’re a good enough stock-picker, you should enjoy
capital appreciation through growth, increased income from dividends, and
your rolling-over maturing T-bills will be throwing off a constant source
of fresh cash with which to buy more stocks.
On the other hand, should your stocks go bust, your Treasury bill interest will
provide the cash for you to try again. Again, not bad.
Because No One Cares More About Your Money Than You
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Tags: Investing Strategy, Strategy
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