Options for Making the Market Bearable

Last week Gary Smith penned a piece in which he discussed the importance of reviewing your past picks. Exercises such as these aren't about self-glorification or telling fish tales about the big one you almost landed -- quite the opposite, in fact. As Gary pointed out, the real benefit comes from identifying mistakes and hopefully learning from them.

Following Gary's example, I thought it was time to conduct a review of my own. One difference between Gary's review and mine is that because some of the options positions I've written about are still open, I'll focus on how those are performing and decide whether any adjustments need to be made. I'll also provide a quick review of some closed positions and the lessons that can be gleaned.

Before getting into the specifics, some general observations can be made. Over the past few months I've suggested a dozen different strategies. The overall performance has been profitable. Four positions realized maximum, albeit limited, profitability, two expired as a wash, one incurred a 1% loss, and six positions remain open and are all providing a chance for profitability. Given the incredibly treacherous and volatile nature of the market, I hope the limited risk/reward scenarios I've presented will work to dispel the belief that options are incredibly dangerous investment tools.

"The biggest misconception about options is they are viewed as risky," says George Fontanills, a co-founder and president emeritus of Optionetics. "The biggest mistake made using options is they are used in a risky manner. People should look at their portfolios and realize they can be recreated for a lower cost, lower risk, using options." Fontanills also runs the Pinnacle Appreciation Fund, an all-option hedge fund recently closed to new investors.

Mulling Our Options

A great example of how options can offer a more conservative approach to building a position is the pairs trade. My suggestion was to get long Home Depot (HD Quote) by purchasing its May 25 call and shorting the Lowe's (LOW Quote) April 40 call. The position was established in November for a 55-cent credit when Home Depot was trading at $25 and Lowe's was at $39.