“Aggressive growth investors should make options a strategic part of their portfolio, if for no other reason than to provide another approach to the portfolio through the ups and downs of the business cycle,” argues Richard Croft in a column in today’s Financial Post.
Croft, who is president of the Toronto investment counselling firm Croft Financial Group, points out that value managers, unlike growth managers, “tend to hold a larger percentage of their portfolio in cash, looking to take advantage during market sell-offs …
The problem with cash is that it is the worst performing asset over the long term. The longer you hold cash in your portfolio, the more your performance numbers will suffer.
“In a down market, however, having a cash cushion can be the best of all worlds, because you then have the means to pick up bargains.”
This I where options can prove useful, Croft says. He provides a detailed example of how the naked put write would have done well for an aggressive growth investor through the recent roller coaster ride in General Electric.
“Think of this as an approach for fully invested aggressive investors to average down positions already in the portfolio,” Croft concludes.