October 16, 2018

It’s Time for Hedge Fund Investors to Know Their Options

Hedge fund investors have a wealth of material to learn about options trading which is centralized at The Chicago Board Options Exchange.

Ah, the masters of the universe – hedge fund managers. They get paid to manage money often using complicated financial instruments or knowing a particular market better. One market that can seem more complicated than stocks and bonds is the options market. Investors can arm themselves with knowledge so they know what their managers are doing – and maybe tackle the options market themselves. Steven M. Sears writes an excellent piece in Barron’s summarizing essential resources for education on options. It’s time for hedge fund investors to know their options.

Even though the stock market trading at its highest level in many months, volatility and risk are still the issues that investors must address and try to master.

Readers frequently ask how best to learn about options, because they recognize that puts and calls are the stock market’s heartbeat and a vital risk-management tool.

THE FIRST STOP is optionseducation.org outlining trading strategies. The Chicago Board Options Exchange’s Website (cboe.com) includes access to the CBOE Institute’s online tutorials and practical information, like how many puts to buy to hedge a portfolio.

Larry McMillan’s Options as a Strategic Investment is de rigueur reading. Many traders use his Daily Volume Alert newsletter for ideas. Bernie Schaeffer of Schaeffer’s Investment Research (schaeffersresearch.com) provides a contrarian take on the market. Like McMillan, he offers individual investors a sophisticated yet accessible approach, usually reserved for institutional investors.

If you can get access to Goldman Sachs’ derivatives research, get it. Same for the work of Michael Schwartz, Oppenheimer & Co.’s chief options strategist, and Jim Strugger, MKM Partners’ derivatives strategist (mkmpartners.com/derivatives.html). Strugger is an increasingly influential volatility strategist. Everyone knows VIX, the CBOE’s volatility index; you should also know Bill Luby’s Vix and More blog (vixandmore.blogspot.com).

THE PSYCHOLOGY OF INVESTING and trading is just as important as understanding put and call strategies. Edwin Lefèvre’s Reminiscences of a Stock Operator will change how you think about trading and the markets. It’s a classic for good reason. The struggle of emotions and intellect is handled well in Michael Martin’s The Inner Voice of Trading. Victor Niederhoffer’s Daily Speculations blog (dailyspeculations.com) lets you eavesdrop on the thoughts of a trader who just might be the reincarnation of Jesse Livermore, the great speculator who inspired Lefèvre’s book.

Your money is important which is why you entrust it with a capable money manager. You should know what the strategies are as well. It’s time for hedge fund investors to know their options. With daily doses on blogs, easy-to-read technical books, and even market psychology manuals at your fingertips, your options are endless.

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