They just don't get it.
Meet Alicia, a very good friend and soon to be Harvard Ph.D. who recently decided to invest a portion of her portfolio using options.
As a honors graduate of McGill, Columbia University and now Harvard, her prowess as a mathematician was surpassed by few. Indeed, she was at the top of her game.
She is a savvy investor and quite honestly, understands how to manage a portfolio better than most professionals.
She was recently looking at a wonderful opportunity to sell volatility in the Facebook (Nasdaq:FB) With the underlying stock trading at just over $28 she wanted to sell the July12 21 puts for roughly 0.55. In options lingo – she wanted to sell far out-of the-money naked puts. Based on the Nobel prize winning statistical formulas now available to all investors in an easy to understand format, Alicia knew that the trade had roughly an 85 percent chance of success.
But, she wanted to own a few shares of the company and was willing to be put the stock at $21. Her account met the capital requirements.
Unfortunately, with the exception of a few savvy options brokers, the financial industry would not allow Alicia to make the trade.
They didn't care that she was essentially a mathematical genius and that even though she was a novice to options she thoroughly understood her risks. They assumed she was too stupid to make the trade. Why? Simply because of the amount of money in her account and her limited exposure to options.
Basically the industry was telling her that it was not suitable for her to understand that she should create wealth based on sound investment strategies where you have over an 85 percent chance of success and a 15 percent chance to lose. They considered the trade too risky.
They assume she is too stupid to exit a position and neglected to understand that her risk was defined. As I stated before, while good options savvy brokers understand the benefits and risks involved in this type of trade, most brokers would never allow it to happen unless you had a huge account. Most brokers won't allow an investor to sell puts without having to jump through hoops and that is shameful.
Now, these hoops aren't that difficult to jump through – in fact, they're pretty simple to overcome. But the mere fact that there are obstacles at all turns off most investors. Which means that if you have even a little bit of patience and diligence, you can tap into a powerful and lucrative asset class that most people won't even consider.
Don't let Wall Street tell you that you're too stupid.
Next week I will go how one would sell puts to acquire Facebook stock. Stay tuned.
Editor and Chief Options Strategist