Volatility, Cash and Options

No sooner than I put the Thanksgiving leftovers in the fridge than COVID rear its ugly, spiked head again and blew up Black Friday. Bah humbug, indeed. From an investor’s perspective, though, the timing, magnitude, and driver of last Friday’s volatility spike offer valuable lessons. Chief among these lessons are the benefits of:

  • Maintaining a solid, actionable investment plan commensurate with your risk tolerance,
  • Allocating a portion of your assets to cash, and
  • Utilizing options to mitigate a portion of this volatility.

An investment plan should be crafted to your risk tolerance with appropriate allocations to fixed income, equities, and cash, and with well-researched equity, ETF, or mutual fund weightings across economic sectors. If a few percentage points of volatility in the equity markets one way or the other rattles confidence in your plan, chances are it and your risk tolerance are misaligned.

Having a cash component in your asset allocation plan offers a buffer with which to get your plan aligned with your risk profile – if it’s not already. Also, cash provides dry powder with which to add to disproportionately beaten down positions if you deem them worthy of additional investment – an active
rebalancing effort, if you will.

Finally, providing that you possess a solid understanding of how options function, covered calls and cash-secured puts present the potential to mitigate the possible impacts of short periods of volatility. Income generation represents another prospective benefit of complementing your core investment plan with an options strategy.

If you want to chat about any of this, we’re here to help: (713) 444-3560 or ctrimble@solycowealth.com.