On Wednesday morning BlackRock (BLK) chairman and CEO Larry Fink took an indirect swipe at the options industry. Speaking to CNBC's Becky Quick, Fink noted that "most players in markets make money on the velocity of money and so they are trying to talk about quick trades and options trades and these other things which all studies show have negative outcomes for most people."
Perhaps not surprisingly Jon Najarian, co-founder of OptionMonster, takes vigorous offense to the sweeping generalization and suggests Fink check his homework.
In the attached video, Najarian makes his case for options with the help of independent studies from Duke University, UMass, Russell Investments and others. "I think investors are very much helped and can generate significant income in a zero interest rate environment as well as protect their portfolio using options."
Najarian has posted his work on the Option Monster web site. The data he's laid out suggests a strategy of selling calls on stocks in their portfolio can mute the realized volatility of a portfolio without dramatically limiting upside potential.
For example, if you own 100 shares of XYZ and it's trading at $10 per share; selling a single call option with an $11 strike price for $1 would generate $100. The $100 is the shareholder's money to keep regardless of what happens prior to the option expiration.
The risk created in this scenario is that XYZ goes above $11 prior to options expiration. Should that be the case our options seller would be forced to sell his stock to the buyer of his call option for $11 a share. That capital appreciation above that level belongs to the call buyer, not the shareholder.
If XYZ is anywhere below $11 when the option expires the shareholder keeps the $100 and the stock itself. That's great if XYZ is $10.99 on expiration. Should the stock fall to say $5, the trader's loss would be $500 on the shares less $100 of collected premium.
According to Najarian a call write strategy like this would take only a couple hours a month.
Are there risks with options? ABSOLUTELY. To Fink's point most investors are better off doing nothing for substantial periods of time. Regardless, for those willing to spend the time and energy mastering trading strategies, selling covered calls is far less risky than Larry Fink suggests.
For those inclined to learn more about options strategies, check out Najarian's Street Monster Investment Conference coming up next week.