In 2015, my entire trading account and a significant part of my measly net worth was wiped out due to a series of misguided options trades. The lure of overnight riches had me speculating on the markets via options. This failure led me to swear off options entirely, attributing my losses to speculative and riskiness of options.
However, during my CFA studies, my perspective changed. I discerned that options, when utilized correctly, offer a unique safeguard against unforeseeable market movements, all the while retaining the potential for substantial returns.
The essence of an option is that it permits decision-making post-event, reducing reliance on forecasting. If there is one thing that kills you in markets, it’s your ability to forecast.
Now my investment strategy is not complicated at all, it is simply dollar cost averaging into a bunch of ETFs. I do not have the desire nor the capital to trade options. However, the whole concept of optionality is intriguing and can be applied to any facet of life.
Consider a colleague I’ve known for over a decade. His approach to his career is representative of this concept. While he diligently adheres to his 9-to-5 commitments, he concurrently initiates and cultivates various side projects. Rather than abandoning these endeavors, he maintains them in stasis. It’s evident that he’s integrating the principle of optionality into his professional life.
So, what exactly is an option? At its core, an option grants its holder the right, but not the obligation, to undertake a specific action. However, the value of options varies. The most advantageous options present a significant asymmetry between their associated costs and potential benefits. True optionality aims for low-cost options that possess boundless potential.
Harnessing the full power of optionality necessitates a contrarian outlook and a unique perspective. When you can discern value in areas others overlook, you position yourself to identify low-risk, high-reward opportunities. If the potential is immediately evident, the demand (and consequently, the cost) will surge.
From a mathematical standpoint, optionality is a pursuit of decisions with limited downside (1x, for instance) but extensive upside (such as 100x). It’s reminiscent of the expected value in statistics: the potential outcomes, when weighted by their probabilities, yield the anticipated value of a decision or event.
Life’s trajectory is inherently unpredictable, making it essential to understand and integrate optionality into our choices. Nassim Taleb’s “barbell strategy,” as delineated in his book Antifragile, presents a viable framework. Personally, I’ve been exploring this strategy across various facets:
- Career: While maintaining a steady day job, I diversify by immersing myself in side projects that have the potential for passive income.
- Finances: My primary investment strategy is to consistently invest in diversified market indices, allocating a minor portion for speculative bets.
- Learning: I endeavor to acquire varied skills. By layering these skills, even if not mastered, I distinguish myself in my professional domain.
- Work: By pursuing opportunities beyond standard metrics and expanding my professional network, I remain open to unforeseen prospects.
To genuinely capitalize on optionality, one must adopt a long-term vision. Prioritizing immediate gains could potentially eclipse the broader opportunities optionality presents.
Taleb’s observation that “Optionality can be found everywhere if you know how to look” is particularly salient. From investments to interpersonal relationships, recognizing and seizing high-optionality situations can be a potent strategy to mitigate risk and amplify potential rewards.
The challenge lies in discerning these opportunities amidst the cacophony of daily choices.