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Fort Collins, CO | Some legal first:
My Series 3 license does not allow me to advise on securities (equities, bonds, equity options, etc.), only futures and futures options, so nothing that follows should be considered securities advice. Rather, it should be considered a general commentary on trading and markets. Further, none of what follows should be considered specific trading recommendations.
Onto the answer:
I don't know that there is a "general" strategy in any market. Many different participants hold many different positions for various reasons. Could someone own an underlying and "collar it off," as you suggest? Sure, but someone else would have to take the opposite side of the options trade at a minimum (and likely the underlying side, too, at least to some degree). So, every market has a bare minimum of two "general" strategies. Do people trade collars in the equity and equity index option markets? Yes. Is it a good idea? I don't know - it depends on personal risk tolerance, where skew is at the time of the trade, how at-the-money volatility performs relative to that skew, and so many other factors. In general, trades like collars could be effectively replicated with fewer commissions and less path dependency by adjusting the size of the underlying position.
When I traded equity and equity index options as a market maker and proprietary trader, I employed various strategies centered on volatility (in its many forms) and not direction. Now that I manage risk for corn and soybean producers, I use them to solve the non-linear risk associated with corn and soybean production. In these ways, options find their highest, best uses. Outside of these uses, options often add unnecessary complexity, generally high transaction costs (for most participants), and various risks (vega, gamma, theta, skew, etc.) that are not always well understood (even by many advisors).
All too often, options get viewed as a panacea, which they are not, nor are they a free lunch. Are options useful tools? Absolutely. Is there a well-defined "set it and forget it" options strategy that works so regularly in any market that it could be considered a "general" strategy? I've yet to find one in 20+ years of trading options.
I know that's probably not the answer you were hoping for in an answer, but it's the best I can give you.
Thanks for the question,
James | |
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