Professor Svetlana Bryzgalova and others write in their letter that retail investors lost over $2bn trading options in less than two years (Letters, December 6).
This is certainly a dire warning. But trading options is a zero-sum game. For each long option which has been bought there is a short option which has been sold. So, if retail investors lost $2bn buying options then someone else made $2bn selling those options. Now, selling options without the underlying stock as collateral to create a naked short is a high-risk strategy susceptible to unlimited loss, so most likely only of interest to aggressive investors with deep pockets.
There is, however, an opportunity for a retail investor to profit from selling call options when holding the underlying stock. This covered call strategy entails only the risk of opportunity loss if the stock price rises significantly above the strike price of the call. If the stock is called (sold) at a strike price higher than the purchase price, then the investor makes a profit on both the stock and the short option. There may be a place, therefore, for certain option strategies in a modest portfolio if a private client is willing to investigate how options work.
Michael Vavrinek
London W2, UK
