Time is the friend of the wonderful company, the enemy of the mediocre.
Options are derivative contracts which can be used by investors in a diverse set of contexts – to insure their portfolios, purchase shares at a lower level than the prevailing market price, enhance the yield of their equity portfolios or take leveraged positions whilst carrying a limited amount of risk. GAM has traded options for many years, predominantly using the following trading strategies:
Selling out-of-the-money covered calls (where the option writer owns the obligated quantity of the underlying security and is obligated to deliver the shares should they reach a certain level) is a popular strategy that enables the stockowner to generate additional income which is similar to receiving an additional dividend.
GAM recommends writing puts (where the option writer is obligated to purchase shares should it fall below a certain level) on key stocks it recommends, selecting strike prices based upon a combination of fundamental and technical analysis, which fall into the core defensive and cyclical categories.
FTSE 100 Strangle
This strategy allows investors to trade the range of the FTSE 100 rather than the direction using options contracts by selling high strike price call options whilst simultaneously selling low strike price put options. If the market stays within the range, the entire option premium is retained.
For further information on the options market and our trading strategies, please download our “A Guide to the Traded Options Market“.
Disclaimer: Trading options is a high risk strategy which can result in losses that exceed your initial deposit. Trading derivatives may not be suitable for everyone, so ensure that you fully understand the risks involved.