Secret 94THE MAGIC PYRAMID
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Every investor should have a grand master plan. In other
words, an asset allocation plan, a plan that shows how you will
invest your liquid assets. The question is how should options fit
into that plan.
Options enable you to have a much more hedged portfolio,
much more cushioned from risk yet with the ability to generate
much better gains than a traditional portfolio.
The Magic Pyramid lays out the grand master plan. At the
base of the pyramid are your cash and cash equivalents ( i.e. Tbills,
money market funds, etc.). I am a big advocate of having a
lot of cash. And with options you can greatly enlarge your cash
holdings and use option strategies to provide the opportunity for
growth to your portfolio.
One level above your cash position would be your bond
holdings. Here, only include high rated short term and
intermediate bonds, especially if rates are low. To cover some of
the currency risk, an international bond fund may be wise. Swiss
bonds are a good alternative here.
About 5% to 10% of your portfolio should be in hard assets,
such as gold or platinum or securities that produce such assets.
The next level of your asset pyramid would be stocks or mutual
funds. Here the structured products we discussed would be
very appropriate. They allow equity participation with little
downside risk, a risk that most investors have discovered is much
higher than they had thought.
Options should be an important part of your stock portfolio.
Put writing can be used to acquire stock at lower prices. Covered
call writing can be used to take profits and generate more income
for your portfolio. Buying cheap puts can provide a downside
cushion of insurance and protection for your stock portfolio.
Buying Leaps® and Leaps® spreads (to be covered in the next section)
can be used as a surrogate for stocks to reduce the downsize
risk and increase potential rewards. Altogether, options can maximize
the gains and minimize the risks for your stock portfolio.
The next level of the pyramid is for more aggressive option
strategies. Here debit spreads, credit spreads, diagonal spreads
and ratio spreads would come into play, and for the gladiators in
the crowd, naked writing.
At the peak of the pyramid, you need some option plays that
will give you firing power for your portfolio. Here I would buy or
build a portfolio of cheap options year after year, always going for
the home runs. This is the part of the portfolio where your fun
money comes into play, but never use more than 5%–10% of
your portfolio to do so.
Every investor should have a grand master plan. In other
words, an asset allocation plan, a plan that shows how you will
invest your liquid assets. The question is how should options fit
into that plan.
Options enable you to have a much more hedged portfolio,
much more cushioned from risk yet with the ability to generate
much better gains than a traditional portfolio.
The Magic Pyramid lays out the grand master plan. At the
base of the pyramid are your cash and cash equivalents ( i.e. Tbills,
money market funds, etc.). I am a big advocate of having a
lot of cash. And with options you can greatly enlarge your cash
holdings and use option strategies to provide the opportunity for
growth to your portfolio.
One level above your cash position would be your bond
holdings. Here, only include high rated short term and
intermediate bonds, especially if rates are low. To cover some of
the currency risk, an international bond fund may be wise. Swiss
bonds are a good alternative here.
About 5% to 10% of your portfolio should be in hard assets,
such as gold or platinum or securities that produce such assets.
The next level of your asset pyramid would be stocks or mutual
funds. Here the structured products we discussed would be
very appropriate. They allow equity participation with little
downside risk, a risk that most investors have discovered is much
higher than they had thought.
Options should be an important part of your stock portfolio.
Put writing can be used to acquire stock at lower prices. Covered
call writing can be used to take profits and generate more income
for your portfolio. Buying cheap puts can provide a downside
cushion of insurance and protection for your stock portfolio.
Buying Leaps® and Leaps® spreads (to be covered in the next section)
can be used as a surrogate for stocks to reduce the downsize
risk and increase potential rewards. Altogether, options can maximize
the gains and minimize the risks for your stock portfolio.
The next level of the pyramid is for more aggressive option
strategies. Here debit spreads, credit spreads, diagonal spreads
and ratio spreads would come into play, and for the gladiators in
the crowd, naked writing.
At the peak of the pyramid, you need some option plays that
will give you firing power for your portfolio. Here I would buy or
build a portfolio of cheap options year after year, always going for
the home runs. This is the part of the portfolio where your fun
money comes into play, but never use more than 5%–10% of
your portfolio to do so.