Welcome to The Options Edge, your source for unique analysis and investment ideas. Investing can be one of the most intellectually and financially rewarding activities in which one can engage. However many miss out on the opportunity, frustrated by ineffective investment advice, intimidated by the markets and language of investing or simply overwhelmed by the number and types of available investments and/or volume of data available. In response, some may elect instead to simply buy a low-fee index fund or ETF if they desire exposure to stocks, bonds, commodities or real estate. Many of the benefits of this approach are well advertised; low fees, some measure of diversification, a systematic investment approach to security selection, possibly favorable tax treatment and relative simplicity among them. Moreover, it is also often publicized that many, if not most, fund managers fail to beat the major market averages such as the S&P 500 or the Russell 2000 Index, net of fees.
However, it has also been well documented that some investors and investment strategies have consistently delivered superior risk-adjusted returns versus the broad market indices over time and that these results cannot be explained away by luck. At The Options Edge, we endeavor to use a disciplined approach based on unique analysis and proprietary methods and tools to uncover ideas other investors overlook. This leads to consistent and superior results relative to the standard formulaic approaches. We outline the trades we make and detail our rationale. At its core, our investment approach is guided by three primary elements.
- Valuation – We believe that the movements of security prices create periods of over (or under) valuation. We use deep-dive fundamental analysis to identify these mispricings.
- Technical – Institutional investors move large blocks of stock that impact how asset prices behave. By analyzing price action, we can track the footprint of their actions and find clues about where an asset’s price is headed next. Through this analysis, we identify setups that help define entry and exit points that limit risk, take advantage of a change in direction or confirm a trend.
- Sentiment – We believe that market sentiment towards the broad market, sectors, industries and individual securities can become excessively negative or exuberant. We seek to identify sentiment that helps explain why a valuation opportunity (mispricing) might exist.
This process defines “What to Trade.” The next step is to determine “How to Trade It.” Knowing how to structure a trade that is consistent with one’s risk preferences and return objectives is just as important as identifying the investment thesis. When we are bullish, we generally suggest buying the asset outright. In addition, we recommend the appropriate options structure to either reduce risk, improve the probability of profit, or even increase the potential profit from an idea. These structures are driven by the investment theses, the degree of conviction, existence of a catalyst (or lack thereof), maximum downside risk one is willing to accept and the price of options relative to the amount of volatility one expected over the life of a trade. We have used these techniques in our institutional investing for years and began publishing our ideas – over 120 of them – in early 2016. We are very transparent about our results. Click here to see a summary of the results of our trade ideas.
It is important for you to be educational and informed. To that end, we encourage you to read and understand the free materials found under the education tab on the menu bar. For a more in-depth review of our investment approach, we encourage you to read our books The Options Edge (Wiley 2016) and Quantitative Analysis in Debt Valuation & Management (McGraw Hill).
We want investors to be as educated and informed as possible. At the same time, we know people have busy lives with family and work. To help people get the most out of their investment dollar, we provide a subscription service that provides news, education, analysis and investment ideas.
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Image Source | Lorenzo Cafaro, pexels.com
