28 Sep Yield for the New Year
When the most aggressive asset becomes a “defense player”
One of the most important rules you learn in the I.D.F flying course:
Because things move fast you must plan ahead,
New Year is always a great opportunity to rise above the daily activities and try to set goals for next year.
One of the advantages is that it is happening to us in September, we have three more months to prepare.
Everything today happens very fast.
Innovation in today’s business environment surpasses your wildest imagination: Who would have thought that the robot Taxi driver in one of Arnold Schwarzenegger movies will become reality and with Israeli technology.
Until recently, being small and nimble was an advantage in the business world; now if you are not one of the four giants, Google, Amazon, Facebook or Apple, you have a much bigger challenge.
This is the reason there are so many mergers in all industries; so if you cannot beat them join them.
In today’s zero interest rate world standard deviation became the new interest rate.
In a quick shift to the capital market: It is no longer possible to build a balanced portfolio in the classical method diversifying risk-free assets and risky assets. In the interest-free world everything, absolutely everything is a risk asset.
So we shifted from a model of ownership to leasing.
When everything moves so fast and yesterday’s leader could be at the bottom of the list today, we wanted to bring some certainty and stability to portfolios – and started to hedge.
And how it all fit together?
When everything is temporary but moves sharply up and down it creates volatility.
The volatility is reflected in the prices of options that have become very expensive, especially those on growth companies.
You can now buy shares and immediately sell the right to buy them – to a third party.
So we turn a stock purchase transaction into a kind of a leasing transaction.
Leasing period is up to the date on which the option expires.
The method of buying a stock and selling an option against it, allows to quantify the yield obtained and use it for protection in case the stock declines and not least, makes the investment less volatile and more secure.
The options market that always rhymes with risk suddenly becomes protection, and as volatility becomes higher the protection becomes even more significant and allows even the prudent among us to invest in growth companies.
Thus, it helps plan, set goals for the coming year, and most importantly, protect the portfolio.
So the next time the market goes down there’s no need to run for cover because with covered calls, “you are covered”
And have a great year
Dedicated to Irit, who knows how to turn dreams into reality