Investment Quant

Equity options have been a fairly fast growing part of the financial world for a while now. Unfortunately, since they started from essentially no nominal trading value 30-40 years ago, even growing at 10%+ per year over the last 20 years, they are still a small part of the overall investment arena. That’s unfortunate because the two main types of options each have a fundamental characteristic that make them useful for many investors including retail investors.

Call options give the buyer of the option the right, but not the obiligation to sell a pre-set amount of a specific stock at a given price up until a certain date in the future. Basically this is useful for investors who buy a stock, say AT&T, don’t expect it to go much of anywhere and are mainly interested in the dividened. In this scenario, the investor can sell calls that give the buyer of the calls the right to buy AT&T from the investor at a price equal or above what the investor paid. In return for this the investor gets a fee upfront from the buyer of the call (the option premium). Essentially this transaction allows the AT&T investor to add to his dividend income without having to invest any more money. Of course if AT&T’s stock goes up, the investor will have to sell it, but frankly that is not a big concern for most investors.

Various academic studies have shown that this method of investing leads to lower, but more consistent returns, than just buying the stock itself. The intuition here is that the investor misses out on big run-ups in stock price, but they get more consistent income, and they have a slight amount of protection in the event that the stock market drops.

Put options are the opposite of call options. They give the buyer of the option the right to sell a specified stock at a given price for a given period of time in the future. Essentially put options serve as a kind of stock market insurance. Given that newspaper and magazine articles routinely cite the volatility in the stock market as one of the main factors scaring away retail investors, put options should be of great interest to many investors.

Options in general are still fairly uncommon as an investment for most individual investors. Hoepfully this will change eventually. This article I wrote recently discusses using call options in gold trading for those interested in more on this topic.

I have become interested in the returns to preferred stocks lately as I think they are an under recognized asset class. I am still looking at historical data but for those interested in reviewing some of the investment options, a list of the top 100 preferred stocks by current yield is below. With that in mind, note that these stocks can be bought through most brokers including online platforms, but the volume on them is much lower than on conventional common stocks.