Options are Better than Stock (Part 4)

I feel I have done a pretty good job of establishing that options are better than stocks for most investors. One exception might be bullish speculators.

I previously demonstrated option outperformance when the stock moves lower, sideways, or moderately higher. I also made a strong case that options provide more consistent returns.

I previously suggested that options are inferior with regard to bullish speculation but I actually believe the opposite. If someone tells me up-front her goal is speculation then I would make the case for option leverage. “Swinging for the fences” is pretty much synonymous with buying options!

While no one option strategy is better in all market environments, given any market environment one can come up with an option strategy that should outperform.

For the average investor trying to build a nest egg for retirement, I have made a strong case for options as the superior way to go. One may worry naked puts/covered calls are limited-profit vehicles but I would ask how often it happens that the market runs away to the upside? This could be backtested. Even if this happens enough to result in lower annualized returns, the greater consistency of option performance likely makes up the difference. Besides, speculation (i.e. gambling) has no place in building a nest egg.

I did an internet search for “why don’t financial advisers use options” and found one enlightening response:

      > You’re right to ask what the average financial
      > adviser (FA) knows about investing… But, I
      > think you’re underplaying a few additional points.
      > First, that most FAs don’t have options
      > registrations — so options aren’t even in their
      > world view…

Advisers as fiduciaries are bound to act in the clients’ best interests. In my opinion, if they cannot do this because they lack “registrations” then they simply should not be in the business. If advisers cannot do this because they lack proper option education then that is even worse.

      > Second, in this era of “low cost advisory” many
      > clients are on active missions to cut their
      > costs — expense ratios, trading fees — and make
      > no mistake, but any active option overlays are
      > going to have associated, non-trivial costs.

I would argue stocks and options to be comparable with regard to transaction costs. Given the proper know-how, any adviser can do either without significant material cost.

Bottom line: options options options, folks! This may be just what the industry needs to cure itself of the subpar returns people have been conditioned to expect and accept.