The 2024-25 NBA season is in full swing. We’re just about 10 games into the regular season and we’ve seen some dominant performances from the reigning champion Boston Celtics, as well as from the tallest man in the league; Victor Wemby.
All bets are off. Which superstar looks poised for an MVP campaign? Which rookie to watch? Will a new All Star game format make it interesting to watch again? – last season’s performance was awful.
As all this remains to be seen, the same can be said of the new options market; Are we going to have weekly Index-linked options? Zero day ones? Options on futures? No one knows.
But this is true; whether professional games or markets, when kick-starting a good campaign, preparation is fundamental. To this end, I’ll highlight two rookie strategies for the new options market: covered calls and protective puts.
For starters, a call option is a financial contract that gives the buyer the right to purchase an asset at a specific price, but not the obligation to do so.
Inversely, a sell call option, also known as writing a call option, is a financial contract where the seller receives a premium in exchange for the obligation to sell an asset at a specified price within a set period of time if the buyer exercises the option.
With this in mind, covered calls involve selling calls for an investor with an existing portfolio. If one believes the market has topped and will move sideways after a good run, they could opt to run this strategy.
Same strategy can also be used to achieve income on the portfolio beyond any dividends. The goal in this case is for the options to expire worthless. Additionally, the strategy works well as a way to lower the cost basis of a stock you’ve just purchased.
For protective puts, an investor buys a put option – a financial contract giving the buyer the right to sell a specific number of shares at a strike price, before a certain expiration date, and for this right, the buyer pays the seller a premium.
Strategy works when you believe the market is about to fall (and your fears are borne out), losses on the portfolio are offset by the put option as it profits as prices fall.
Remember that the premium paid on the put will never be refunded, so the hedge has a cost (unlike a futures hedge). However, if prices rise, the long underlying position can still show an overall profit once the cost of the put premium has been recouped.
That said, this is not investment advice. Thorough research and practice is essential. In fact, for most, trading options could be a bad idea. But I’m not going to curb your enthusiasm.
Those eagerly waiting, it’s advisable going in after much practice with only small amounts at risk. Don’t count on “Rookies luck”. And as they do this, this quote by Mark Twain on markets (tweaked for emphasis) should also live rent-free in their heads, “October: This is one of the peculiarly dangerous months to speculate in options. The others are July, January, September, April, November, May, March, June, December, August and February.”
Mwanyasi is MD, Canaan Capital