Profiting from doing nothing


Profiting from doing nothing

Most inves­tors are loo­king for stra­te­gies that pro­fit if pri­ces move. Surely it is nice to ride a stock upwards. But for the last 15 years cal­cu­la­ted by move­ments of the DAX-Index it was not a suc­cess­full approach. He who bought at  8000 points in 2000 is loo­king at a level of 10.000 points 15 years after, a yield of just  25 % for 15! years equi­va­lent to a meager 1,66% p.a. wit­hout reinvest­ment or even less (about 1,5% taking reinvest­ment into account). Lots of inves­tor igno­re the fact that mar­kets can go side­ways for lon­ger than wan­ted. Buy­ing at the lows is an excel­lent set­up but hard­ly ever achie­ved (even though our com­pa­ny has some good tools to hint in this direc­tion),  but we are cer­tain­ly not even clo­se to an after crash low. Bet­ter accept the rea­li­ty and pro­fit from it. If stocks go side­ways stra­te­gies that pro­fit from such move­ment are the right ones. How to pro­fit if not­hing moves?  Sel­ling opti­ons to other mar­ket par­ti­ci­pants is teh ans­wer. An opti­on is a finan­ci­al con­tract tra­ded on an exchan­ge that enab­les to opti­on buy­er to buy a stock at a cer­tain pri­ce over a peri­od of time (Call-Opti­on) or to sell it (Put-Opti­on).

Assumin g a stock tra­des at the € 100 level. If we could find some­bo­dy that is inte­rested to buy (call) at € 100 (strike) and pay us  € 5,- as an option´s pre­mi­um and some­bo­dy else spe­cu­la­ting bei­geleg­tent­hat pri­ces fall loo­king for a € 100-Put pay­ing the same pre­mi­um of € 5 we recei­ve € 10 in inco­me. Ome opti­on always expi­res. If the püri­ce in gthe future at expi­ry is € 95, the call buy­er will not exer­ci­se his right to buy at € 100 and in turn at € 105 the put buy­er will stay away from sel­ling to us at € 100.

So only if the pri­ce clim­bs above 110 or falls below 90 we are encounz­te­ring an over­all loss. Even at 107 for examp­le the call buy­er will exer­ci­se his right to buy from us at 100 make a pro­fit of 2 (taking into acc­count that he had to pay 5 to be able to buy at 100 and now may sell at 107) and we loo­se 2 on this leg of the posi­ti­on, but as we recei­ved the other opti­on pre­mi­um tooihr whoch ful­ly expi­res worth­less to the put buy­er we sare still run­ning an over­all pro­fit. We have to buy at 107 and deli­ver at 100 making a loss of 7 but in turn have recei­ved 10 in opti­ons pre­mia yiel­ding an over­all gain of 3 still.

Using such stra­te­gies an inves­tor may crea­te a broad span of pri­ces in bet­ween every out­co­me is pro­fi­ta­ble. Fur­ther posi­ti­ve effect: As long as the set­up works no fur­ther action is nec­cessa­ry. Ear­ning by doing not­hing.