This week on Invested, Danielle guides us through a review and clarification of our options talk from last week. We’ll be talking about how the investing greats use options to protect their profits, and Danielle explains why she’s not worried about the recent Chipotle call. We’ll top it all off with a little input from the listeners.
In Episode 169 You’ll Learn:
- Options can function as an insurance policy to protect profits
- Options can help us when we want to lock in a price that we feel fits the intrinsic value of the company
- Options can be very dangerous if you are not well-versed in them before beginning to trade
- To buy/sell with options, you must already own 100 shares, as this is the standard number to be traded
Why are options dangerous?
- You must have a very strong view of the intrinsic value of the company
- Most options traders follow the modern portfolio theory that the intrinsic value is equal to the price. We know that’s not true.
- You must have the experience! You’ll need weeks, if not months, of backtesting and work before you even begin
- This, in addition to intrinsic value, are reasons people lose money on options
- Rule #1 Value Investing vs. Traditional Value Investing
- Traditional value investors will buy 200 stocks that are very cheap that they haven’t done the research on and refer to this as value investing
- Rule #1 value investing refers to seeing the intrinsic value of a business, i.e. finding a wonderful business, and then buying that business on sale
- Phil and Danielle recommend: “Invested”